International Business

Evolution of International Banking

Prof Bharat Nadkarni

International Business : Prof Bharat Nadkarni Evolution of International Banking Banks are intermediaries which accept deposits and lend to the industrial and personal borrowers. This intermediation process achieves moderation of risks of both depositors as well as borrowers. The risk is higher in international business than in domestic business. Banks earn spread which is the difference between deposit interest rates and lending rates. Spreads is the recovery of banks cost and profits.

Business entities have high dependency on banks as they provide term loans, working capital, bill discounting, bank guarantees and deposit facilities for parking surplus funds. Banks transactions crossing national boundaries is termed as international banking.

International Business : Prof Bharat Nadkarni Motives for Internationalization of Banking 1. Migration of enterprises (piggy ride) 2. Optimization of cost of capital (diff in int rates) 3. Diversification benefits (benefits of intl trends) 4. Regulatory avoidance (interventionist approaches) 5. Expansion of Banks custodial function (for clients securities)

International Business : Prof Bharat Nadkarni Features of International Banking Following key aspects distinctly highlight features of international banking which are absent in domestic banking.

1. 2. 3. 4. 5.

Currency Risk Complexity of credit risk Competition for market share among banks Cyclical nature, with periodic crises Competition for bank loans from the international bond market 6. Importance of intl interbank market (IIBM) as source of liquidity and funding for banks 7. Role of risk management activities (swaps, options, futures)

International Business : Prof Bharat Nadkarni Early Years of International Banking Formation of BIS (The bank for Intl settlements Basel, Switzerland) Important events of Intl Banking a. The 1973 Oil crisis. The Yom Kippur War (Arab-Israel) b. The 1982 Intl Banking Debt Crisis

Importance of International Banking in India a. Poised to be the third largest public private partnership (PPP) by 2025 b. Sixth largest in FE reserves c. One of the biggest markets for techno-MNCs d. Acknowledged base for IT enabled services e. Hub for Auto component industry f. Vast industrial & services infrastructure g. Indian conglomerates on foreign acquisition spree.

International Business : Prof Bharat Nadkarni Role of International Banking in industrial growth in India 1. Service sector would need greater support from the banks. Their contribution to GDP is growing. 2. Banks need to address growth of agro-industry and agribusiness. 3. Generating savings, augment capital formation and increase income levels. 4. Banks have greater role in Exports and Trade finance. Banks initiatives in this regard are : a) Centrally integrated treasury b) Specialized overseas branches c) Offering of derivative products to clients d) Offering risk mitigation and hedging mechanism

International Business : Prof Bharat Nadkarni Functional overview of International Banking Customer related functions Compliance related (regulatory) functions Inter-bank functions Internal functions Letter of Credit Definition : A letter of credit is a written commitment by a buyers or importers bank to make payment of a defined amount of money to a beneficiary (seller exporter) according to the terms and conditions specified by the buyer or importer.

International Business : Prof Bharat Nadkarni The importer / applicant will give the issuing bank instructions that cover such items as : 1. Name, Address, I/E code No., other contact information 2. Description of the material supplied incl quality, quantity, price, full invoice 3. The method, place and form of shipment, location of final destination and other shipping issues incl transshipment, partial shipment and the shipping date. 4. Documents Cert of Origin (Ch of commerce), Cert of quality, quantity, shipping, 5. Type of credit Confirmed/ Irrevocable/ Revocable.

International Business : Prof Bharat Nadkarni Understanding Export Cycle Purchase Order Received Processing Shipment and Documents tendered to the Bank Payment Received from the Overseas Buyer 1. Pre-shipment Export Credit 2. Post-shipment Credit 3. Export Rediscounting 4. Gold Card Scheme approved by RBI 5. Foreign Currency Import Credit

International Business : Prof Bharat Nadkarni 6. Suppliers Credit 7. Bank Guarantees for Imports 8. L/C for project Exports 9. Guarantees for Project Exports 10. Fund Based Facilities for Project Exports 11. Remittances 12. Derivatives offering