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Corp Banking

Corp Banking

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Published by: Pravah Shukla on Apr 10, 2010
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Corporate Banking is responsible for the overall relationship management of major corporate and institutional clients. Corporate Banking delivers a comprehensive range of financial products and services to many of the world s top-tier corporate and institutional clients..


Corporate Banking represents the wide range of banking and financial services provided to domestic and international operations of large local corporates and local operations of multinationals corporations. Services include access to commercial banking products, including working capital facilities such as domestic and international trade operations and funding, channel financing, and overdrafts, as well as domestic and international payments, INR term loans (including external commercial borrowings in foreign currency), letters of guarantee etc.

Corporate Banking Project Finance  Infrastructure Finance  Syndication  Underwriting & Advisory Services  Carbon Credits Business  Working Capital  Cash Management Services  Trade Finance  Tax Payments  Derivatives


Creating Money Creating an optimum money supply Transfer of funds Pooling of Savings Extension if Credit Financing of foreign trade Trust Services Safekeeping of Valuables Merchant-banking services Brokerage Services


Overdraft Cash Credit Purchase or discounting of bills Working capital Loan Letter of credit Up to July 4, 2008 non-food credit of scheduled commercial banks (SCBs) rose by 25.9 per cent (Rs.4,85,709 crore) on a year-on-year basis, higher than 24.6 per cent (Rs.3,69,109 crore) a year ago.


Working Capital Finance Project Finance Export credits Foreign currency loans Deferred Payment Gaurantees Corporate Term Loans Structured Finance Equipment Leasing Loan Syndication


Credit analysis 

Collecting information of the borrower Appraising the project and financial statements Assessing the quality of the management team Doing due-diligence of the borrower assessing the risk associated with the proposed credit making the recommendation based on a thorough analysis of the project. 

Credit delivery and administration

Some Regulations 



Loans/ advances granted to individuals against the security of shares, debentures and PSU bonds should not exceed Rs.10 lakh and Rs.20 lakh, if the securities are held in physical form and dematerialized form respectively. For WCR below 1 cr-the working capital requirement is to be assessed at 25% of the projected turnover to be shared between the borrower and the bank, viz. borrower contributing 5% of the turnover as (NWC) and bank providing finance at a minimum of 20% of the turnover. For WCR limit above 1 cr-Banks are now free to decide on the minimum current ratio and determine the working capital requirements according to their perception of the borrowers and their credit needs. For WCR limit above 5 cr-min 5% requirement should be met with Bill finance. For WC limit above 1ocr-banks may persuade them to go in for the Loan System by offering an incentive in the form of lower rate of interest on the 'loan component' as compared to the 'cash credit component' Banks are allowed to fix separate lending rates for 'loan component' and 'cash credit component'. The loan component , may be renewed/rolled over at the request of the borrower Banks are free to adopt loan syndication route. NBFCs should not be provided finance for on-lending to individuals for subscribing to IPOs. Loan to priority sector should be atleast 40% of net bank credit(32% for foreign banks). Total agricultural advances should be atleast 18% of net bank credit.



Priority sector constitutes Agriculture, SSIs and other activities/ borrowers. SSIs are those units in which investment of plant & machinery does not exceed 1 crore (enhanced to 5 cr. for some industries specified by RBI. Tiny enterprises- investment is upto 25 lacs. Also includes term loans/loans in the form of line of credit to State Industrial dev corp/ SFCs for financing SSIs, credit given to KVIC, SIDBI, subscription of bonds floated by SIDBI, SFCs, NSIC, NABARD, HUDCO etc. Ship breaking activity, small road and transport operators (SRWTO), retail traders dealing in essential commodities, professionals and self-employed persons whose borrowing limits do not exceed 10 lakhs of which not more than Rs. 2 lakhs should be for working capital requirement, also considered as priority sector. Housing loans upto 5 lakhs in rural/semi urban sector and 10 lakhs in urban and metros Within the overall target of 32%, SSI advances have to be 10% and export credit to be 12% of net bank credit. Regarding working capital, long term funds should be used to finance CAs and bank borrowings to be reduced progressively. The loan component should comprise more permanent req and demand cash credit portion to take care of fluctuating req. This would bring financial discipline. Banks should not finace more than 40% of the cost of project in case of construction activities apart from housing . No finance should be extended for infrastructural activities and construction of buildings meant purely for govt/semi govt offices including municipal and panchayat offices.

Assets and Liabilities of Banking System 


Cash and Bank balances with Reserve Bank of India. Balances with banks and money at call and short notice. Investments (securities) Loans Fixed Assets Other Assets. 

Of these types of assets, investments, and loans and advances - (about 40%) as a percentage of total assets.
Of these assets of the banks, Cash and Balances with RBI, and Balances with Banks and Money at Call and Short notice are the most liquid assets. These two groups of assets put together occupy about 10% to 12% of the total assets of banks, Investments by banks in Government Securities, Other Approved Securities, and Non-Approved Securities- about 40%  


Capital Reserves and Surplus Demand Deposits Savings deposits Time deposits Inter-bank deposits Money market deposits Borrowings (short term and long term) Other Liabilities and Provisions Contingent Liabilities.

Financial Analysis of Banking organizations 

) Return on Equity b) Return on Investments c) Leverage or Debt to Equity or Debt to Capital d) Interest Income to Average Assets e) Interest Expenses to Average Assets f) Net Interest Income to Average Assets [(d) ñ (e)] g) Non-interest income to Average Assets h) Non-interest income to Total income i) Income from Treasury activities/Investments j) Operating Expenses to Average Assets k) Provision for Loans and losses to Average Assets l) Growth Rate of Assets m) Growth Rate of Net Worth n) Cash dividends to PAT o) Provision for NPA to Total Loan

Difference between manufacturing firms and banks 

The manufacturing firm has 60% CA nd 40% FA whereas bank has 77% CA & 3% FA. Current ratio of firm is 2 whereas bank has <1. Firm finance with 60% debt and 40%equity whereas its assets with 90%debt and 10% equity. market value of bank assets are more volatile than firms Hence greater the bank capital, the greater the amount of safe assets and lower the amount of risk. Greater capital also enhances its earning potential.

Profitability of banks 

External Factors 

Credit targets given by the government Cash reserve ratio and statutory liquidity ratio. Norms relating to credit to deposit ratio. Management of working capital Administration and operational efficiency Geographical factors Changes in the pattern of deposits and credit Level of overdues, bad debts and defaults 

Internal factors 

Efficiency and Expense Control ratios Operating efficiency=TOE/TA Cost of funds=TIE/Total deposit and borrowings Efficiency=Non-int Income/Net TI Income productivity per employee Tax ratio Liquidity ratios Demand to time deposit ratio Demand deposits to total assets ratio credt extended to total assets Cash to total deposits SLR to total invtts Net loans to assets ratio Risk ratios Equity multiplier=TA/Equity Equity to TA ratio Capital adequacy ratio Risk weighted assets to TA Net NPAs to equity ratio Net NPAs to assets ratio Profitability ROE ROA Profit margin P/E ratio Net interest margin Yield spread EPS Interest cost to total assets ratio



C- capital adequacy- to maintain capital commensurate with the nature and extent of risks. A- asset quality in order to minimize risks. M- Management quality E- earnings (not only amount of current earnings but also expected earnings in future). L- liquidity S- sensitivity to market risk (sensitivity to interest rates,exchange rates and prices etc).



Cash book Cash balance book Cash Reserve book Day book Ledger (current account ledger, savings bank ledger, fixed deposit ledger, investment ledger, general ledger) The accounts and balance sheets are required to be duly audited by statutory auditors (including branch auditors) appointed with the approval of RBI. While international accounting standards are broadly followed, specific valuation standards have been prescribed in respect of investments and foreign exchange positions.


Tier I Capital  Paid-up capital  Statutory reserves  Disclosed free reserves  Capital reserves representing surplus arising out of sale proceeds of assets Note- In computing Tier I capital, equity investment in subsidiaries, intangible assets, and losses are deducted. Tier I capital should not be less than 50 per cent of total capital. Bank capital is generally much less than 10%of assets whereas non-financial firms may have capital assets ratios in the range of 40-60%.

Tier II Capital 

Undisclosed reserves and cumulative perpetual Preference shares Revaluation reserves (should be considered at a discount of 55% for being treated as part of Tier II Capital). General provisions and loss reserves Hybrid debt capital instruments Subordinated debt (instruments in foreign currency) Limit on subordinated debt-bank s aggregate investment in Tier II bonds issued by other banks and financial institutions shall be permitted up to 10 per cent of the investing bank s total capital.

Note-The total of Tier II elements should be limited to a maximum of 100 per cent of total Tier I elements.

Other liabilities 

Deposits Borrowings   

Borrowings in India(call money market, bank rediscounting scheme,refinance facaility from RBI IDBI/NABARD/EXIM Bank,issue of unsecured bonds Borrowings outside India (thru ADRs or GDRs,overseas borrowings Note-Shareholders of Banks are not given voting rights

Requirements under Banking Regulation Act 

Banking companies, carrying on business in India must see to it that: a) Banking Company can issue only Equity Shares. (Section 12). b) The subscribed capital of a Banking Company (carrying on business in India) must be at least one-half of the authorized capital; and the paid capital must be at least one-half of the subscribed capital (Section 12). c) The capital of a Banking Company consists only of ordinary or equity shares and such preference shares as may have been issued before 1st July 1944. d) Private Banks registered as public limited companies under the Companies Act, 1956, must have a minimum paid-up-capital of Rs.200 Crore. e) The Capital Adequacy Ratio (CAR) of all banks operating in India must be a minimum of 8%, and it should be 10% by 2002. Capital Adequacy Ratio refers to the percentage of capital and reserves (after writing off bad debts) of a Bank to its assets.     

Regulations regarding capital and reserves

Regulations regarding Reserves
) Reserve Fund Under Section 17 of the Banking Regulation Act, 1949-Reserve Fund must have 20% of net profits . However, the Central Government is empowered to exempt any banking company from the requirement on the recommendation of the Reserve Bank of India. 2) Capital Reserves  Capital Reserve Account as shown in the Balance Sheet consists of the following components:

i) Gains on sale of securities in the permanent category ii) A portion of the excess provision towards depreciation on investments (net of taxes) iii) The Banks have not resorted to any asset revaluation to improve Capital Adequacy Ratio because

3) Share Premium Reserve  Premium on issue of share capital may be shown separately under this head. 4) Revenue and Other Reserves  The expression Revenue Reserve shall mean any reserve other than capital reserve.  This item will include all reserves, other than those separately classified. The expression reserve shall not include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability. 5) Balance of Profit  Includes Balance of Profit after appropriations. In case of loss, the balance may be shown as a deduction.

Banking Regulation 

In line with international best practices, India follows Basel Committee on Banking supervision (BCBS). It was decided in October 1998 that the minimum Capital to Risk Asset Ratio(CRAR) for banks should be enhanced from the existing 8 per cent to 9 per cent with effect from the year ending March 31, 2000 and to 10% by March 31, 2002. implementation would require, upgradation of branch interconnectivity, human resource skills and database management. Banks have to maintain CRR of 8.75% and SLR of 25% . Maintain additional Tier I Capital of 5% on foreign currency position limit approved by the Reserve Bank of India. Banks may use the credit ratings awarded by the credit rating agencies for assigning risk weights for credit risk for capital adequacy purposes: Credit Analysis and Research Ltd., CRISIL Ltd., Fitch India, and ICRA Ltd. Fitch, Moody s and Standard & Poor s   

Banking regulation-Contd.  

Claims on domestic sovereigns (Central and State Governments) will attract a zero risk weight while those guaranteed by State Governments will attract 20 per cent risk weight. Claims on corporates will be risk weighted as per the ratings awarded by the chosen rating agencies. Unrated claims on corporates will attract a risk weight of 100 per cent. Claims above Rs.50 crore sanctioned/renewed on or after April 1, 2008 will attract a higher risk weight of 150 per cent; this threshold will be lowered to Rs.10 crore with effect from April 1, 2009 Claims eligible for inclusion as regulatory retail portfolio, specified claims secured by mortgage of residential property, loans and advances to banks own staff meeting the specified conditions, and consumption loans up to Rs.1 lakh against gold and silver ornaments shall attract a preferential risk weight ranging between 20 per cent and 75 per cent. Claims in respect of a few specified categories such as venture capital funds, commercial real estate, consumer credit including personal loans and credit card receivables, capital market exposures, and claims on non-deposit taking systemically important NBFCs will attract risk weights of 125 per cent or 150 per cent. 


Banks are required to maintain a minimum capital to riskweighted assets ratio (CRAR) of 9 per cent on an ongoing basis minimum Tier I ratio of at least 6 per cent. Banks below this level must achieve this ratio on or before March 31, 2010. The floor has been fixed at 100 per cent, 90 per cent and 80 per cent for the position as at end-March for the first three years of implementation of the Revised Framework. Banks are required to maintain, at both solo and consolidated level, a minimum Tier I ratio of at least 6 per cent. Banks below this level must achieve this ratio on or before March 31, 2010. Indian banks with offshore branches and foreign banks in the country moved to Basel II requirements from March 31, the end of the 2007/08 financial year. Other banks have until March 2009 to start complying with the Basel II norms.   


Procedure  Classify assets on the B/S into risk categories eg. 

Cash, bal with RBI 0 Bal with other banks 20 Invt. In govt. securities 2.5 Invt where pymt of int and repymt of principal guaranteed by govt


Other invt. Where not guaranteed Claims on commercial banks Deposits with SIDBI/NABARD Invtt in bonds issed by other banks Invtt in bonds issued by PFIs Housing loans to individuals
Consumer credit

22.5 22.5 102.50 22.5 102.5 75


Leased assets Loans guaranteed by govt. SSI advances guranateed by CGFTSI
Loans given to staff

100 0 0

Advances against term deposits,life isurance,NSCs etc.


Procedure contd. 

Convert off-balance sheet contingent liabilities to on- b/s by multiplying CL by the credit conversion factor . eg; 


Bank guarantees,LCs etc 100 Performance binds, warranties,stand-by LCs 50 Documentary credits 20 Note issuing facilitie,revolving credit50 Other commitments 50 Sale & repurchase agreements 100

Procedure contd.  

Multiply the rupee amt of assets in each category-funded and non-funded,converted into the credit equivalent-by the appropriate risk weights. This will give the amount of risk weighted assets. For overall capital requirement- find the sum of capital requirement for credit risk on all credit exposures excluding items comprising trading book on the basis of risk weights given below and capital requirement for market risks in the trading book.

Capital requirement for market(interest risk) in the trading book 

Trading books includes the following:
Securities under AFT category  Securities under AFS category  Open gold positions  Open forex position limits  Trading positions in derivatives  Derivates entered for hedging purposes Procedure A capital charge is applied to current market values of these securities Two separate charges are applied-a separate risk charge and a general market risk 

Capital Charges for specific risk 

Invtt in govt securities 0 Invtt in other sec where pymt of int and repymt of principal are guaranteed by state govts 0 where not guranteed 1.8 Invt in state govt- guaranteed where invt is non-performing 9 Claims on banks including invts in securities guaranteed by banks: final maturity 6 months to less, .30
6-24, 1.1250 

>24 mths) 


Instruments on subordinated debt instruments and bonds issued by other banks for tier 2 capital 9 Invt on MBS of residential assets of HFCs 6.75 Invt in securitised paper pertaining to infrastructure facility 4.5 All other invts (eg. Equity) 9 

Capital Charges for market risk 

Calculate the modified duration of each instrument in the portfolio. This measures price sensitivity. Apply the assumed change in yield to the modified duration of each instrument between .6 and 1 percentage points, Slot the resulting capital charge measures into a maturity ladder with fifteen time bands. Apply a 5% vertical disallowances to long & short positions in each time band Finally, carry forward the net positions in each time band for horizontal offsetting subject to the horizontal disallowances. Capital charge for specific risk and general market risk of 9% on gross equity positions. The risk-weights for open positions in forex and gold is 100% The general market risk charge will be 9% on the gross equity positions.

Operational risk mgmt  

This is the loss resulting from inadequate or failed internal processes,people and systems or from external events. This includes legal risk but excludes reputation risk. Measures   

Developing an appropriate risk management environment Identification,assessment,monitoring and mitigation/control Role of supervisors Role of disclosures


Money Market 

Money market is a market short term funds eg. Call money market, bill market, short term loans market, treasury bills, commercail paper, certificate of deposits, money market mutual funds etc.

Capital Market Capital market is the market for long term funds.


CALL MONEY MARKET-The money market where investments are made in the form of money at call (call money) is called the call money market. It functions as an immediate source of short term funds thereby ensuring the liquidity of the banking system. The major suppliers of money in the call money market are State Bank of India, Life Insurance Corporation and Unit Trust of India. The major borrowers are the nationalized banks, foreign banks and co-operative banks. INTERBANK CALL MARKET- is a part of the domestic money market from where banks borrow and lend on a daily basis. All scheduled commercial banks (private sector,public sector and cooperative banks), financial institutions (term-lending institutions,insurance companies) and mutual funds can participate in this market.  



Call Money: Money traded over night, i.e., amounts borrowed today have to be returned the very next day. Notice Money: Money traded for 2 to 14 days. Term Money : Money traded for 15 days to 3 months. Bills Rediscounting: 15 days and up to a maximum of 90 days. treasury bills : with maturity of 91 and 364days.

Money market instruments 

deposits and loans, repurchase agreements Treasury bills, bankers acceptances, commercial paper, and certificates of deposit.

When does Banks participate in Money Market:
Take Debt  When they fall short of statutory Reserve requirements may be due to a change in rates or next 2 points.  When they fall short of funds to meet withdrawal requirements from customers  When they fall short of funds to lend at more attractive rates Loan Debt  When they have surplus idle funds.

Role of government 

Fiscal policy Monetary policy

Role of Central Banks 

Firstly, the central bank could do this by setting a required reserve ratio, which would restrict the ability of the commercial banks to increase the money supply by loaning out money. If this requirement were above the ratio the commercial banks would have wished to have, then the banks will have to create fewer deposits and make fewer loans then they could otherwise have profitably done. If the central bank imposed this requirement in order to reduce the money supply, the commercial banks will probably be unable to borrow from the central bank in order to increase their cash reserves if they wished to make further loans. They might try to attract further deposits from customers by increasing their interest rates, but the central bank may retaliate by increasing the required reserve ratio. The central bank can affect the supply of money through special deposits. These are deposits at the central bank, which the banking sector is required to lodge. These are then frozen, thus preventing the sector from accessing them, although interest is paid at the average treasury bill rate. Making these special deposits reduces the level of the commercial banks operational deposits, which forces them to cut back on lending. The supply of money can also be controlled by the central bank by adjusting its interest rate, which it charges when the commercial banks wish to borrow money (the discount rate). Banks usually have a ratio of cash to deposits, which they consider to be the minimum safe level. If demand for cash is such that their reserves fall below this level, they will able to borrow money from the central bank at its discount rate. If market rates were 8%, and the discount rate were also 8%, then the banks could reduce their cash reserves to their minimum ratio, knowing that if demand exceeds supply they will be able to borrow at 8%. The central bank, though, may raise its discount rate to a value above the market level, in order to encourage banks not to reduce their cash reserves to the minimum through excess loans. By raising the discount value to such a level, the commercial banks are given an incentive to hold more reserves, thus reducing the money multiplier and the money supply. Another way the money supply can be affected by the central bank is through its manipulation of the interest rate. This is akin to the discount rate mentioned above. By raising or lowering interest rates, the demand for money is respectively reduced or increased. If it sets them at a certain level, it can clear the market at level by supplying enough money to match the demand. Alternatively, it could fix the money supply at a certain rate and let the market clear the interest rates at the equilibrium. Trying to fix the money supply is not easy, so central banks usually set the interest rate and provide the amount of money the market demands. The central bank may also affect the money supply through operating on the open market. This allows it to manipulate the money supply through the monetary base. It may choose to either buy or sell securities in the marketplace, which will either inject or remove money respectively. Thus, the monetary base will be affected, causing the money supply to alter. To illustrate this, suppose the central bank sold gilts(Risk-free

Primary market and Secondary Market 

Primary Market
The primary market deals in new issues of equity and debt either publicy or privately or in the form of a rights offer. Secondary Market The secondary market deals in trading of existing stock, done by stock exchanges. 


The major players and their main role in the money market is listed below : Player Role Central Bank Intermediary Government Borrowers/Issuers Banks Borrowers/Issuers Discount Houses Market Makers Acceptance Houses Market Makers Fis Borrowers/Issuers MFs Lenders/Investors FIIs Investors Dealers Intermediaries Corporates Issuers

Role of banks in Money market 

Banks can participate in treasury bills,govt. securities,commercial paper,CDs issued by RBI on behalf of Govt. Of India These measures included extending short selling in the Central Government securities to five-day basis, introduction of when issued market, permitting diversification of primary dealer (PD) business and extension of the NDS-OM module to new participants such as qualified mutual funds, provident funds and pension funds. HDFC Bank Limited was granted approval to take up the PD business and it commenced operations with effect from April 2, 2007. Pursuant to issuance of guidelines for banks undertaking the PD business, nine banks took up PD business departmentally, hitherto carried on by their group entities. With the inclusion of HDFC Bank, the total number of PDs as on July 31, 2007 stood at 18, of which 10 are bank PDs and eight are stand-alone PDs.

Role of Banks in Capital Markets 

Banks have set up their subsidiaries who act as lead managers and underwriters to the new issues in the primary market. Scheduled banks can act as bankers to the issue by registering themselves with SEBI. Merchant bankers deal in corporate counseling, project counseling and pre-investment studies, capital restructuring, credit syndication and project finance, issue management and underwriting, portfolio management, non-resident investment, working capital finance, acceptance credit and bill discounting, mergers and acquisitions, venture capital, leasing finance, foreign currency finance, fixed deposit broking, mutual funds and relief to sick industries.

Bankers to the Issue 

The duties of banks include the following:  


Acceptance of application and application money. Acceptance of allotment or call monies. Refund of application monies. Payment of dividend or interest warrants.

Merchant Banking 

Activities in Merchant banking 


Merchant banking involves the following activities in India: Project Appraisal and financing Loan Syndication Issue Management Advisory / Consultancy Services Financing export of capital goods, ships, hydro-electric installations, railways. Issue of foreign currency bonds Raising Euro-dollar loans Mergers, Acquisitions & Takeovers Valuation of assets Equipment leasing Promotion of investment trusts.


Equity Issue (Public/Rights) Management
Debt Issue Management 

Private Placements Project Appraisals Monitoring Agency Assignments IPO Funding Security Trustee Services Agriculture Consultancy Services Corporate Advisory Services Mergers and Acquisitions Buy Back Assignments Share Valuations Syndication          


Project Appraisal Capital structuring 

Preparation of offer document Tie Ups (placement) Formalities with SEBI / Stock Exchange / ROC etc., Underwriting Promotion /Marketing of Issues Collecting Banker / Banker to an issue Post Issue Management Refund Bankers Handling of Dividend Warrant/Interest Warrant Payments Debenture Trusteeship         

Regulations on Capital Market



The exchange rate is simply the price of one currency in terms of another. It is the ratio in which they are exchanged or prices in terms of each other are known as exchange rates. 

There are two methods of expressing it:  

1. Domestic currency units per unit of foreign currency - for example, taking the pound sterling as the domestic currency, on 16 August 1997 there was approximately £0.625 required to purchase one US dollar. 2. Foreign currency units per unit of the domestic currency - again taking the pound sterling as the domestic currency, on 16 August 1997 approximately $1.60 were required to obtain one pound. 


i.e.second method is merely the reciprocal of the former. A rise in the pounds per dollar exchange rate from say £0.625/$1 to £0.70/$1 means that more pounds have to be given to obtain a dollar, this means that the pound has depreciated in value or equivalently the dollar has appreciated in value. A rise in the exchange rate from $1.60/£1 to say $1.80/£1 would mean that more dollars are obtained per pound, so that the pound has appreciated


To permit transfers of purchasing power denominated in one currency to another-that is to trade one currency for another currency. In the spot market currencies are traded for immediate delivery, which is actually within two business days after the transaction has been concluded In the forward market contracts are made to buy or sell currencies for future delivery.



Foreign exchange market is the market where the currency of one country is traded for that of another country and where the rate of exchange is determined. This is used in international trade, foreign investment, lending and borrowing of foreign currency. This primarily functions through telephone and telex. The foreign exchange market is an over-the-counter market; this means that there is no single physical or electronic market place or an organized exchange (like a stock exchange) with a central trade clearing. Mechanism where traders meet and exchange currencies, the market itself is actually a worldwide network inter-bank traders, consisting primarily of banks, connected by telephone lines and computers. It is the largest financial market in the world. It is a highly sophisticated financial markets. The daily turnover in this market in mid 2000s was estimated to be about $1600 billion. London, Tokyo, New York, Frankfurt, and Zurich are major centres of forex market. Most of the trading, however, is confined to a few currencies: the US dollar ($), the Japanese Yen, the Euro, the German deutsche mark (DM), the British pound sterling, the Swiss France (SF), and the French franc (FF). The turnover in forex market including derivative products futures, options and swaps is around Rs. 1.9 trillion US dollars a day in 2008. 5% of forex market turnover relates to trade flows, 15% for capital flows and 80% is the dealing that banks do amongst themselves. This market is relatively free of regulations and central banks lay down capital standards and voluntary codes of conduct. There are no regulations for investor protection and transparency.

Foreign Exchange Market     

While a large part of inter-bank trading takes place with electronic trading systems such as Reuters Dealing 2000 and Electronic Broking Systems, banks and large commercial, that is,corporate customers still use the telephone to negotiate prices and conclude the deal. Geographically, the markets span all the time zones from New Zealand to the West Coast of the United States. Thus, the market functions virtually 24 hours enabling a trader to offset a position created in one market using another market The five major centers of inter-bank currency trading, which handle more than two thirds of all forex transactions, are London, New York, Tokyo, Zurich, and Frankfurt. Transactions in Hong Kong, Singapore, Paris and Sydney account for bulk of the rest of the market. The most heavily traded currency is the US dollar, which is known as a vehicle currency - because it is widely used to denominate international transactions

Characteristic Features 

24-hour open-market World-wide market:No single location no geographical constraint Large capital and trade flows.

Currencies and Their Symbols

Codes for selected currencies 

USD: US Dollar EUR: Euro GBP: British Pound IEP: Irish Pound (Punt) JPY: Japanese Yen CHF: Swiss Franc CAD: Canadian Dollar AUD: Australian Dollar DEM: Deutschemark SEK: Swedish Kroner NLG: Dutch Guilder BEF: Belgian Franc FRF: French Franc DKK: Danish Kroner ESP: Spanish Peseta ITL: Italian Lira INR: Indian Rupee SAR: Saudi Riyal


Retail clients-businesses, international investors, multinational corporations Commercial banks-for retail clients or for themselves to alter the structure of their assets and liabilities in different currencies. Foreign exchange brokers-they collect buy and sell quotations for most currencies from many banks, so that the most favorable quotation is obtained quickly and at very low cost. Central banks-central banks-frequently intervene to buy and sell their currencies in a bid to influence the rate at which their currency is traded.

Structure of Foreign Exchange Markets


Quoting of Exchange rates 

Spot rate- is the rate at which the foreign currency rates are quoted for immediate delivery. Forward rate-- is the rate at which the foreign currency rates are quoted for future delivery. These are the 30-day, 90-day, and 180-day forward prices. Direct Quote- Home currency is quoted per unit of foreign currency . The direct quoted takes the value of the currency as unity.In India, direct quote is used.Eg: 

Rs. 40= US $ 1 currency. FFr 3.3 = DM1

40 units of home currency for 1 unit of foreign 3.3 units of French Franc for 1 unit of deutche mark. 

Indirect Quote- When foreign currency is quoted per fixed units of home currency 

Example: US $ 2.857=Rs.100. 

Dealers quote all currencies against the dollar since its is the world s dominant currency and simplifies work.


Quotes are always given in The first rate is the buy, or bid, price: the second is the sell, or ask, or offer, rate. Bid Price-Buying price of the dealer. Ask or offer price- Selling price of the dealer. Percent spread =( Ask price - Bid price)/Ask Price x 100 Eg: USD/EUR .9670/.9682, USD/GBP .7121/.7126 Cross rates -is the price of any currency other than the home currency. In India, a cross rate is any exchange rate which excludes Rupees. Given that: USDIINR I-month forward: 47.6955/47.6965 USD/CHF I-month forward: 1.4550/1.4555 The synthetic CHF/INR I-month forward quote is: CHF/INR I-month forward = (47.6955/1.4555)/(47.6865/1.4550) = 32.7691/32.7811 A currency pair is denoted by the 3-letter SWIFT codes for the two currencies separated by an oblique or a hyphen Examples: USD/CHF: US Dollar-Swiss Franc GBP/JPY: Great Britain Pound-Japanese Yen   

Cross Rates 

Suppose that SDM(0) = .50 

i.e. $1 = 2 DM in the spot market i.e. $1 = ¥100 

and that S¥(0) = 100  

What must the DM/¥ cross rate be?
DM $ DM ! v since , ¥ ¥ $ DM DM 2 DM 1 $1 ! v ! ! ¥ ¥100 $1 ¥50   S DM / ¥ (0) ! .02 or DM1 ! ¥50


Since banks use telegraphic transfers, mail transfers and demand drafts for inward/outward foreign exchange remittances, different types of exchange rates used are: 

TT-buying and selling rate- banks transfer funds from one country to another by telex instructions. Now banks are using SWIFt for international fund transfers. Bill buying and selling rate Currency buying and selling rate Traveller s cheque buying and selling rate   

The authorised dealers have to apply the relevant rate depending on the nature of transactions. India follows a system of exchange rates wherein the value of rupee was determined with reference to the daily exchange rate movements of a selected no. of countries who are India s major trading partners also known a basket of currencies. RBI maintains the rupee value of the basket currencies within a band. The actual composition of the basket has not been disclosed to discourage speculation.

Different types of rates 

TT-selling rate: this is used for 

outward remittance in foreign currency Cancellation of purchase for example bill purchased earlier is returned unpaid A forward purchase contract cancelled Import documents received directly by the importer For transfer of proceeds of import bills. 

Bill selling rate: used for 

Different types of rates 

TT-buying rate-whenever NOSTRO account has been credited 

For clean inward remittances Conversion of proceeds of instruments sent on collection basis Cancellation of earlier outward remittance: TT, MT or DD etc. Cancellation of forward sale contract 

Bill buying rates 

For purchase/discounting/negotiation of export bills. The transit period is 15 days. The processing of export bills is fixed at 0.25% in India by FEDAI


If foreign currency is trading at a forward premium, the points are added to the spot price and if foreign currency is trading at a forward discount, the points are subtracted from the spot price in case of direct quotes. Forward rates are quoted in terms of the premium or discount to be added to the spot rate which is quoted in two numbers, the bid price and ask price.

Determinants of Exchange Rates 

Short term factors 

Trade Stock exchange Banking Currency and credit conditions Political and Industrial conditions Trade factors- the demand and supply of a foreign currency due to exports and imports. Stock-exchange factors- This is due to the affect of granting of loans, repayment of loans, receipt of interest, payment of interest purchases and sales of foreign securities etc. Banking- Due to activities of the bank, such as purchase or sales of banker s draft, traveller s letters of credit, arbitrage operation, changes in bank rate. 

Long-term factors 

Role of Banks in For-ex transactions: 

Settlement of debts between traders both at home and abroad for the goods they buy and sell. Providers of credit-The banks finance the importers through Letter of Credit and exporters through Pre-shipment and Post-shipment finance Act as major source of information on overseas trade through regular bulletins and special reports. The dealing happens in a dealing room comprising of front office, mid office and bank office. Market making banks trade among themselves in the form of swaps which involve both spot and forward contracts. In forex trading, 2/3 of the transactions are spot, 1/3 swap and only around 2% outright forwards.

Forex dealing room operations 

Dealing room is the nodal point for all forex activity of a bank. The front office of the dealing room has an interbank and a corporate desk. The mid office deals with administration of the risk management policy of the bank. The bank office is responsible for a follow-up of every transaction enters into by the bank till settlement happens. The dealing room is connected through electronic network and the rate quotation is always available on the screen meant for trading currencies.



Banks extend trade finance products through their selected branches, designated as foreign exchange specialised branches. Trade finance functions include: Financing the importers Financing the exporters 

Pre-shipment finance Post-shipment finance

Financing importers through letter of credit  


A letter of credit is a commitment on the part of the bank to place an agreed sum at the seller s disposal on behalf of the buyer under precisely defined conditions. He seller is assured of getting payment after he presents the documents as per LC terms to the negotiating bank. LCs are also known a documentary credit The are governed by provisions of Uniform Customs ands Practices for Documentary Credits (UCPDC) framed by ICC, Paris. LCs can be revocable, irrevocable. Revolving, transferable, etc.















3 L/C

Parties involved in LC 

Applicant (buyer) Issuing bank or opening bank Benefiaciary (Exporters) Advising bank Confirming bank Reimbursing bank

Steps depicting a typical inport transaction with letter of credit 



Step1- The importer signs a purchase contract for buying certain goods Step2- the importer requests his bank to open an LC in favour of the exporter Step3-the importer s bank opens an LC as per the application Step 4-The opening bank will forward the origial LC to the advising bank in the exporter s country Step 5- The advising bank forwards the same to the exporter Step 6-The exporter scrutinizes the LC to ensure that it conforms to the terms of the contract Step 7-In case any terms are not as agreed, the importer will be asked to make the required amendments to the LC Step8- if the LC is as required, the exporter proceeds to make arrangements of the goods

Steps depicting a typical import transaction with letter of credit 


Step 9- the exporter will effect the shipment of goods Step10- the exporter will prepare export documents and submit to his bank. Step11-the exporter s bank (negotiating bank) verifies all the documents with the LC Step12-the bank negotiates the bill idf all terms are met. Step13-the exporter receives the payment in his bank account if he wants post-shipment finance Step 14-The LC issuing bank receives the bill and documents from the exporter s bank Step 15-the importer accepts the bill and gets the shipping documents covering the goods purchased by him Step 16 -the LC issuing bank reimburses the amount to the negotiating bank if the documents are in order. Step 17 -Exporter receives the payment upon realisation, if he has not availed post-shipment finance.


Pre-shipment Finance to exporter 



It can be availed in rupee or in foreign currency. Banks extend packing credit to exporters on production of either a LC or a confirmed order It is also granted as advance against incentives receivable from the govt., advance against duty drawback and advance against checks/drafts received as an advance payment. It is also given as a running account facility to exporter with good track record, provided exporters produce LC within a reasonable time. The period of loan is normally upto 180 days. The rate of interest is concessional. Banks can avail refinance against packing credit from RBI. Packing credit is available for both cash exports and deemed exports

Post-shipment finance to exporter 

This is a loan or advance to an exporter from the date of extending the credit after the shipment of goods to the date of realization of export proceeds. This is extended against shipping documents. 1. Exporter makes shipment. 2. Exporter presents export documents eg. Bill of lading/airway bill, invoice, bills of exchange, insurance policy, certificate of origin, inspection certificate, packing list. 3. Bank verifies the documents. 4. Bank negotiates the bill (if against LC) or purchases bills or discounts bill (if w/o LC). 5. Bill is drawn in foreign currency. 6. Bank credits the exporter s account in rupees. 



FCNR Loan 


Features Tenure is from 6 months to 3 years It can be used for import of capital goods/raw material. Loans will be in foreign currency. Banks are free to decide its interest rates. The interest rates are lower. There is no maximum ceiling on foreign currency loans. Customer can repay loans before due date by paying a nominal penalty.

Exchange earner s foreign currency account 

(EEFC) is a non-interest bearing current account account maintained in foreign currency with an Authorised Dealer by resident persons, i.e a bank dealing in foreign exchange. Permissible credits:     



i) Inward remittance through normal banking channel, other than remittances received on account of foreign currency loan or investment received from abroad or received for meeting specific obligations by the account holder. ii )Payments received in foreign exchange by a 100 per cent Export Oriented Unit or a unit in (a) Export Processing Zone or (b) Software Technology Park or (c) Electronic Hardware Technology Park for supply of goods to similar such unit or to a unit in Domestic Tariff Area. iii) Payments received in foreign exchange by a unit in Domestic tariff Area for supply of goods to a unit in Special Economic Zone (SEZ); iv) Payment received by an exporter from an account maintained with an authorised dealer for the purpose of counter trade. (Counter trade is an arrangement involving adjustment of value of goods imported into India against value of goods exported from India in terms of Reserve Bank guidelines); v) Advance remittance received by an exporter towards export of goods or services; vi) Payment received for export of goods and services from India, out of funds representing repayment of State Credit in U.S. dollar held in the account of Bank for Foreign Economic Affairs, Moscow, with an authorised dealer in India, vii) Professional earnings including directors fees, consultancy fees, lecture fees, honorarium and similar other earnings received by a professional by rendering services in his individual capacity. viii) Interest earned, if any, on the funds held in the account; ix) Re-credit of unutilised foreign currency earlier withdrawn from the account; x) Amount representing repayment by the account holder's importer customer, of loan/advances granted, by the exporter holding such account.

EEFC account 

Permissible debits: i) Payment outside India towards a permissible current account transaction [in accordance to the provisions of the Foreign Exchange Management (Current Account Transactions) Rules, 2000] and permissible capital account transaction [in accordance to the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000]. ii) Payment in foreign exchange towards cost of goods purchased from a 100 percent Export Oriented Unit or a Unit in (a) Export Processing Zone or (b) Software Technology Park or (c) Electronic Hardware Technology Park and payment of customs duty in accordance with the provisions of the Foreign Trade Policy of Central Government for the time being in force. iii) Trade related loans/advances, by an exporter holding such account to his importer customer outside India, subject to compliance with the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000. iv) Payment in foreign exchange to a person resident in India for supply of goods/services including payments for airfare and hotel expenditure.

Exchange Risk 

Exporter-Importer creditworthiness risk Credibility and creditworthiness risk of countries. Changes in Interest rate risk Speculation Economic Policy and Political policy changes Risk of war or epidemics, or riots or any untoward events.

Note-India has adopted full convertibility on trade account in March 1993. This means that exporters can sell their earnings at free market rates to banks and the importers can buy the same from banks at the prevailing market rates from time to time.

Risk management by market makers(Banks)  



Swap forward to spot (agreement between two parties to exchange sets of cash flows over a period in future). Two basic swaps are currency swap and interest-rate swap. Swap forward of one maturity to another maturity Swap one currency against another of same maturity or a different maturity. Buy spot for future liability Buy strong and sell weak currency Buy forward of one maturity against sale of another maturity or of another currency and a host of other techniques.

Currency Swaps 

Spot- Forward Swap transaction 

Swap transaction between currencies A and B consists of a spot purchase (sale) of A coupled with a forward sale (purchase) of A both against B. Thus, suppose a bank buys pounds one month forward against dollars from a customer, it has created a long position in pounds (short in dollars) one-month forward. If it wants to square this in the interbank market it will do it as follows: A swap in which it buys pounds spot and sells one month forward, thus creating an offsetting short pound position one month forward. The rate applicable to the forward leg of the swap will differ from that applicable to the spot leg. The difference between the two is the swap margin, which corresponds to the forward premium or discount. It is stated as a pair of swaps points to be added to or subtracted from the spot rate to arrive at the implied outright forward rate. In the inter-bank market forwards are done in the form of swaps  

Forward - Forward Swaps
Purchase (sale) of currency A 3-months forward and simultaneous sale (purchase) of currency A 6-months forward, both against currency B. Such a transaction is called a forward-forward Swap. It can be looked upon:  as a combination of two spot forward swaps:  1. Sell A spot and buy 3-months forward against B.  2. Buy A spot and sell 6-months forward against B  Currency Future Contract  

A futures contract is a standardized agreement that calls for delivery of a currency at some specified future date, either the third Wednesday of March, June, September, or December. Currency fuures exist for major currencies like the Australian dollar, the Canadian dollar, the British pound, and the Swiss franc, and the yen . Contracts are traded on an exchange, and the clearinghouse of the exchange interposes itself between the buyer and the seller. 

Currency Options Contract Currency options, enable the hedging of "one-sided" risk. Only adverse currency movements are hedged, either with a call option to buy the foreign currency or with a put option to sell it.

Interest Futures   

Many exchanges around the world such as IMM, LIFFE, DTB, MATIF, SIMEX and so on trade, futures on short term and long-term interest rates and debt instruments. Banks, use interest rate futures and financial institutions to hedge interest rate risk A banker who expects some surplus cash in the near future to be invested in short-term instruments may use the same as insurance against a fall in interest rates. A fixed income fund manager might use bond futures to protect the value of her fund against interest rate fluctuations. Speculators bet on interest rate movements or changes in the term structure in the hope of generating profits. Fixed to Floating Interest rate swap and vice versa  

A market maker would quote a bid and in offer swap rate as we have seen above. The spread is the market maker's compensation). The value of the swap as of today is zero.

Interest rate swap 

It is an arrangement where one party exchange one set of interest-rate payments for another  

A standard fixed-to-floating interest rate swap, known in the market jargon as a plain vanilla coupon swap is an agreement between two parties, in which each contracts to make payments to the other on particular dates in the future till a specified termination date. One party, known as the fixed ratepayer, makes fixed payments all of which are determined at the outset. The other party known as the floating ratepayer will make payments the size of which depends upon the future evolution of a specified interest rate index (such as the 6-month LIBOR).

Exchange Controls in India 


Due to inadequate forex resources, GoI levies exchange control to prioritise forex. Exchange control was imposed in 1930 under the Defence of India rules Foreign ex control act was set up in 1947 for restrictions on dealing in forex, on import/export of currency/bullion and regulation of payment for goods exported. The act was replaced in 1957 and directorate of enforcement was set up. The act was again revised in 1974 The forex regulation act came into force in January 1974. Forex regulation act,1973 was replaced by Forex management act in June, 2000. The FEMA provides powers to the RBI for classes of permissible capital acct transactions and its limits




The objective of the act is to reduce volatility, prevent speculation,maintain adequate reserves and develop an orderly forex market. EEFC acct and RFC account holders are freely permitted to use the funds held in these acciunts for payment of all permissible current account transactions Remittances for the foll. Transactions are prohibited- lotteries, banned magazines, ffotball pools etc. Some transactions requires prior approval form the central government. Persons resident in India, earlier resident abroad could hold, own or transfer any foreign security or immovable property situated abroad. Indian cos. Engaged in certain specified sectors can acquire shares of foreign cos. Abroad if they are engaed in similar activities by share swap or exchange through the issuance of ADRs/GDRs upto certain specified limits. FEMA does not apply to Indian citizens resident outside India. All forex transactions are done at market determined rates of exchange. Banks are allowed to buy cross currency options from abroad and sell them to other banks in India. Ads do not have to take prior approval form from RBI for business travel/overseas conferences/study tours/mediacal treatment/chech-ups/training.

Restrictions on Foreign Exchange (as per FEMA 1999)       

Exchange available for business trip-up to USD 25,000 for a business trip to any country other than Nepal and Bhutan(RBI permission not necessary) Visits in connection with attending of an international conference, seminar, specialised training, study tour, apprentice training, etc., are treated as business visits. upto USD 100,000 or its equivalent to resident Indians for medical treatment abroad on self declaration basis of essential details, without insisting on any estimate from a hospital/doctor in India/abroad. For studies outside India -USD 100,000 per academic year or the estimate received from the institution abroad, whichever is higher. For tourism purposes- foreign exchange up to USD10,000, in any one financial year may be obtained from an authorised dealer on a self-declaration basis. For person going abroad for employment- foreign exchange up-to USD100,000 on emigration can draw foreign exchange upto USD100,000 on self- declaration basis Travellers and students are allowed to purchase foreign currency notes/coins only up to USD 2000. Balance amount can be taken in the form of travellers cheque or banker¶s draft . Resident individuals may remit up to USD 200,000 per financial year through any AD, for any permitted capital and current account transactions uner Liberalised Remittance facility. It is mandatory to have PAN number to make remittances under the Scheme

Permissible transactions in capital account 

Classes of capital account transactions of Persons resident in India Investment by a person resident in India in foreign securities Foreign currency loans raised in India and abroad by a person resident in India Transfer of immovable property outside India by a person resident in India Guarantees issued by a person resident in India in favour of a person resident outside India Export, import and holding of currency/currency notes Loans and overdrafts (borrowings) by a person resident in India from a person resident outside India Maintenance of foreign currency accounts in India and outside India by a person resident in India Taking out of insurance policy by a person resident in India from an insurance company outside India Loans and overdrafts by a person resident in India to a person resident outside India Remittance outside India of capital assets of a person resident in India Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad by a person resident in India. 




Schedule II
Classes of capital account transactions of persons resident outside India Investment in India by a person resident outside India, that is to say,
i.)issue of security by a body corporate or an entity in India and investment therein by a person resident outsideIndia; and ii.)investment by way of contribution by a person resident outside India to the capital of a firm or a proprietorship concern or an association of persons in India. 

Acquisition and transfer of immovable property in India by a person resident outside India. Guarantee by a person resident outside India in favour of, or on behalf of, a person resident in India. Import and export of currency/currency notes into/from India by a person resident outside India. Deposits between a person resident in India and a person resident outside India. Foreign currency accounts in India of a person resident outside India. Remittance outside India of capital assets in India of a person resident outside India.

Settlements of transactions in international foreign marketsKey systems

Settlements of transactions in international foreign marketsKey systems 

SWIFT: society for worldwide interbank financial telecommunications  

It transmits financial messages, payment orders, foreign exchange confirmations, and securities deliveries to over 3500 financial institutions on the network, which are located in 88 countries The messages include a wide range of banking and securities transactions, including payment orders, foreign exchange transactions, and securities deliveries. In 1992, the system handled about 1.6 million messages per business day. Real time and online, SWIFT messages pass through the system instantaneously. 


FED WIRE, the Federal Reserve's Fund Transfer System, is a real-time gross settlement transfer system for domestic funds, operated by the Federal Reserve. Deposit-taking institutions that keep reserves or a clearing account at the Federal Reserve use FEDWIRE to send or receive payments, which amounts to about II 000 users CHIPS are an online electronic payments system for the transmission and processing of international dollars. It is operated by NYSE.


CHAPS-clearing house Automated Payments system  

There are 14 CHAPS settlement banks, including the banks of England, along with 400 other financial firms, which, as sub member, can engage in direct CHAP settlements CHAPS is for high value same-day sterling transfers. Bills of exchange is one of the chief means of settlement in trade. It helps the exporter to obtain cash as soon as dispatch of goods is made. The exporter draws a bill on the importer or on the importer s bank and attaches the shipping documents (invoice, insurance policy and bill of lading) and sells it to local bankers who pay the exporter after sending the documents to their banking correspondents in the importer s country. Bill can be payable on demand or payable on acceptance. 

Asian Clearing Union     

The Asian Clearing Union (ACU) was established with its head quarters at Tehran, Iran on December 9, 1974 at the initiative of the United Nations Economic and Social Commission for Asia and Pacific (ESCAP), as a step towards securing regional co-operation. The ACU is a system for clearing payments among the member countries on a multilateral basis. Iran, India, Bangladesh, Bhutan, Nepal, Pakistan, Sri Lanka and Myanmar are the members of the ACU. All authorised dealers in India have been permitted to handle ACU transactions The Asian Monetary Unit is the common unit of account of ACU and is equivalent in value to one U.S. dollar by opening ACU dollar accounts,without approval of RBI. Payments which are not on account of current international transactions as defined by the International Monetary Fund are not allowed to be traded by ACU.

Method of settlement in ACU transactions 

i.Reserve Bank of India undertakes to receive and pay U.S. dollars from/to authorised dealer for the purpose of funding or for repatriating the excess liquidity in the ACU dollar accounts maintained by the authorised dealer with their correspondents in the other participating countries. Similarly, the Reserve Bank of India has also been receiving and delivering U.S. dollar amounts for absorbing liquidity or for funding the ACU dollar (vostro) accounts maintained by the authorised dealers on behalf of their overseas correspondents. ii. Funding of an ACU dollar account maintained with a correspondent bank in another ACU participant country will continue to be effected by Reserve Bank only after receiving an intimation that equivalent amount of U.S. dollar is being credited to its account with the Federal Reserve Bank of New York, New York, by the authorised dealer bank on the value date. Similarly, Reserve Bank will continue to arrange for payment of US dollar from its account with the Federal Reserve Bank of New York to the account of the correspondent of the authorised dealer in New York, in case it has received intimation of surrender of surplus funds to the other participant central bank on behalf of the authorised dealer bank in India. 

Types of ACU Transactions 

a. from a resident in the territory of one participant to a resident in the territory of another participant b. for current international transactions as defined by the Articles of Agreement of the International Monetary Fund c. permitted by the country in which the payer resides d. payments which are in compliance with FEMA 1999, rules, regulations, orders or directions. e. for export/import transactions between ACU member countries on deferred payment terms.


Definition A bank may be said to be international if it uses branches or subsidiaries in foreign countries to conduct business. For example, the sales of U.S dollar denominated deposits in Toronto by American banks with Canadian subsidiaries would constitute international banking; the sale of the same deposits by Canadian banks would be classified as domestic banking. A second definition of international banking relates to the location of the bank. Any sterling transaction undertaken by a bank headquartered in the UK would be part of British domestic banking, irrespective of whether this transaction is carried out in a British Branch or a subsidiary located outside the U.K. but transactions in currencies other than sterling will be part of international banking independent of the actual location of the British branch. A third way of defining international banking is by the nationality of the customer and the bank If, the headquarters of the bank and customer have the same national identity, then any banking operation done for this customer is a domestic activity, independent of the location of the branch or the currency denomination of the transaction. For example, all Japanese banking carried out on behalf-of Japanese corporate customers would be part of the domestic banking system in Japan, even if both the branch and the firm are subsidiaries located in Wales.


They deal in euro-deposits which are currency deposits made in a bank outside the jurisdiction of the Central Bank which issued the currency. Their assets are euro-loans which are large loans sought by big borrowers like government like government and multinational firms. Their liabilities include euro deposits and certificate of deposits. During their business, they face exchange rate risks, Interest rate risks, and default risks. To diversify risk, they use loan syndication and consortiums.



They serve customers having foreign operations like handling of collections and payments for domestic clients, engaged in foreign trade. This fee has become an important component of their earnings. They receive deposits in various currencies called euro deposits in the form of euro dollar CDs, Euro-notes, Floating rate notes, floating rate CDs etc. IBs make loans in different currencies. They convert euro deposits into euro loans as loans can be given against euro deposits. They collect market information which affects the profitability of corporates to whom banks have lent. They collect information on borrowers (also by street-talk). They also provide custodial services by possessing securities, collecting dividend on offer coupons, handling stock splits, rights issue, tax-reclamation etc.


Correspondent Banking-banks in different countries in
which other banks have correspondent accounts. 

Overseas Offices- not authorized to perform banking
transactions, they evaluate credit worthiness of local customers and bank s clients for loans. 

Bank Agency-arrange loans, clear drafts & cheques,
channelizes foreign funds into financial markets. 

Foreign Branches-branches set up by domestic banks Foreign subsidiaries and affiliates-locally
incorporated banks owned wholly or partly by parent bank. 

Consortium banks -set up by different banks to arrange large
loans and underwrite stocks and bonds, for lending to corpns & govts.


Term Deposits Certificate of Deposits Floating Rate Notes (LINKED TO libor)


The international banking services in India is provided for the benefit of Indian customers, corporates, NRIs, Overseas Corporate Bodies, Foreign Companies/ Individuals as well as Foreign Banks etc. Products 

1. 2. 3. 4. 5. 6. 7. 8. 9.

NRI Banking Foreign Currency Loans Finance/Services to Exporters Finance/Services to Importers Remittances Forex & Treasury Services Resident Foreign Currency (Domestic) Deposits Correspondent Banking Services All General Banking Services


It enables banks to manage their assets and liabilities, at the margin to meet daily fluctuations in liquidity requirements, thereby enhancing liquidity smoothing. Global liquidity distribution also takes place, because the market can be used to redistribute funds from excess liquidity regions to areas of liquidity shortage. The market also means deposits initially placed with certain banks can be on lent to different banks, thereby facilitating the international distribution of capital. The hedging of risks by banks is made easier, because they can use the inter-bank markets to hedge their exposure in foreign currencies and foreign interest rates, Regulatory avoidance is the fifth function of the inter-bank market-bank costs are reduced if they can escape domestic regulation and taxation.


International Banking Act, 1978 allows foreign banks to : 

open accounts and accept deposits directly related to international transactions. establish subsidiaries for doing business abroad. hold stock in subsidiaries overseas, borrow and lend funds. accept deposits, loans, exchange currencies, sell govt. and corporate securities, invest in stock etc. 

Under subsection (2) of Section 11, Banking Companies incorporated outside India (Foreign banks operating in India) have to deposit and keep deposited with the Reserve Bank, an amount of 15 lakh of rupees, and if it has a place of business in Mumbai or Kolkata or both, 20 lakh of rupees in cash/unencumbered securities.
20% of the profit for each year in respect of the Business transacted through the branches in India as disclosed in the profit and loss account has to be deposited with the Reserve Bank. On the ceasing of business by any foreign bank for any reason, these deposits shall form the assets of the company on which the creditors in India shall have a first charge  



Banks are not permitted to deal in arbitrage activity in forex exchange. Forward sale contract against export of services (eg. technical knowhow, computer software) may be booked provided the amt does not exceed the contracted value of the services and the period is not over 7 days. A forward sale contract against import of merchandise can be booked if the goods are under OGL or the importer has a valid import license. For releasing forex for foreign travel, the release should not be earlier than a fortnight before the date of commencement of the journey. Sale of forex notes and coins should be only against RBI permit. Banks can give guarantee to exporter on behalf of the importer. A guarantee for the import or export of high priced machinery, heavy electrical plant, ships, etc. on deferred payment terms may be furnished only with prior approval of RBI and the total guarantees should not exceed 15% of its total outstanding loan and advance.

Genesis of Basel Accords


Non-binding agreement Developed since 1999 Sets the standard for prudential regulation among the G-10 countries, Regulatory bodies committed to change any necessary banking laws and regulatory practices in order to abide by the standards and guidelines and statements of best practice.



Basel II comprises three mutually reenforcing pillars: 

o Pillar 1 o Pillar 2 o Pillar 3

capital adequacy supervisory disclosure market discipline  

Foreign Bank Supervision Enhancement act (FPSEB) 1991 Bank of international Settlement

Regulating International Banking 

Basel Committee   

It is a group of central bank heads from 11 industrialized countries. It enhances regulatory cooperation in the international area. Its 1975 Concordat allocated national responsibility for monitoring banking institutions and provided for information exchange.

Overseas Operations of Indian Banks having branches abroad   

Banks provide support to and service India's foreign trade, apart from lending to Indian ethnic community. The branches of Indian banks abroad have been doing predominantly traditional business such as trade financing, negotiations/collection of bills, remittances, etc. emanating mainly from the ethnic clientele overseas. New activities such as project financing, real estate finance, industrial loans, participation in syndicated exposures, sovereign loans, etc, were later taken up.

Overseas Operations of Indian Banks having branches abroad  

Until 1994, different departments in Reserve Bank of India were exercising supervision over banks, nonbanking financial companies and financial institutions. To keep a close watch on financial markets and avoid recurrence of crisis in the financial system, the Board for Financial Supervision was set up under the aegis Reserve Bank under Reserve Bank of India (Board for Financial Supervision) Regulations, 1994 with the objective of paying undivided attention to the supervision of the institutions in the financial sector.

Overseas Operations of Indian Banks having branches abroad 

The Indian banks conducting overseas operations report the assets and liabilities, problem credits, maturity mismatches, large exposures, currency position on quarterly basis and country exposure, operating results etc. on an annual basis. The reporting system has been reviewed and rationalised in 1999 in consultation with the banks and the revised system put in place in June 2000. The revised off-site returns focus on information relating to quality and performance of overseas investment and credit portfolio, implementation of risk management processes, earning trends, and viability of the branches.

A.Funded Assets

B. Non-funded Assets

Other regulations:
Maintenance of CRAR   


After assessing the capital funds and the risk weighted assets, the bank will have to compute the ratio of the capital to risk weighted assets. The minimum CRAR was initially set at 8 percent. However, to meet the international standards, this is being raised to 9 percent with effect from March 31, 2000. Reporting Banks should furnish an annual return commencing form the year ended March 30, 1992, indicating: a. Capital funds b. Conversion of off-balance sheet/non-funded exposures c. Calculation of risk weighted assets and d. Calculation of capital funds ratio. The format for the returns is given as a break-up and aggregate in respect of domestic and overseas operation will have to be furnished. The returns should be signed by two official who are authorized to sign the statutory returns submitted to the RBI.


Corporates deal in the foreign Exchange Market in the following ways: 

Product Markets (Exports-imports) Subsidiaries (Dividend remittance & fin) International Financial Markets (Investing & financing) 

Corporate firms deal in international corporate finance in the following ways:      

1.International Trade_ Firms import and export goods and services and the payments have to be effected internationally. 2. Licensing- A firm can provide its technology (copyrights, patents, trademarks or trade names) in exchange for fees or some other specified benefits. 3. Franchising- A firm can provide a specified sales or service strategy, support assistance and possibly, an initial investment in the franchise in exchange for periodic fees. 4.Joint Venture- This is a venture jointly owned and operated by two or more firms. 5. Acquisition of other firms- allows firms to have full control over other firms. 6. Establishing New Foreign Subsidiaries.


Functions  Cash management services.  Investment advice and assistance to customers and other banks.  Protecting/hedging bank s capital against bank s capital exposure to a particular currency or interest rates or commodity prices.  Buying and selling securities/options.  Speculate on short term interest rate movements. When the treasury expects interest rates to rise(bond prices fall), it goes short (sells securities) and when it expects interest to fall it goes long (Buys securities).

Global Best Practices in Risk and Treasury Management
A comprehensive framework ± 9 part framework

Global Best Practices in Risk and Treasury Management Integrated, not Fragmented Approach (Asset, Liability, Off-Balance Sheet Items)

Global Treasury Services 
All India collection, coverage over 4500 locations

Receivables Management 

Direct debit, tracking, MIS and lock-box arrangement  Electronic payments (ECS (Dr)/ NEFT/ RTGS) and Auto-Recon through ERP integration  Outsourcing of bulk payments processing

Payment Solutions 

Secure environment for processing payments  Zero balance Accounts and transmission of adhoc payment instructions  Corporate - Inventory Finance (pre-shipment) and Receivables Finance (post-shipment)

Trade Solutions 

Structured - Buyer¶s Credit / Supplier¶s Credit Buyer Supported Vendor Financing  Electronic Interface ± Trade Direct ( download advices, establish LCs, authorize payments online)  Bank Fixed Deposits  Government Securities / Treasury Bills, Corporate Commercial Paper / Bonds  Inter Company Loans and Short term (liquid) Mutual Funds  Electronic File Delivery (EFD) facilitates Bulk Payments ± Corporate Checks, NEFT and RTGS  BA Direct, Strategic Global Information Reporting (SGIR) facilitates online account information, enquiry and reporting

Liquidity Management Solutions Electronic Interfaces & Integration

Cash Management Service   


An innovative service specifically tailored to meet the requirements of Corporates/Business houses/Partnership firms Speedy collection of outstation cheques and other instruments Pooling of funds at designated centres More importantly, providing funds to the Corporates as per their need Customised MIS reports

Benefits to the Corporates  



Funds available as per need on day zero, day one, day two, day three etc. Corporates can plan their cash flows Bank interest saved as instruments are collected faster Affordable and competitive rates MIS reports customised to meet individual Corporate's requirement Single point enquiry for all queries Pooling of funds at desired locations

Benefits of Cash Management Services: 

Financial Benefits Operational Benefits Control Benefits Collection Services 

Local Cheque Collections. Upcountry Cheque Collections. Cash Collections. Collections through ECS/RTGS/NEFT. Anywhere Banking. Issue of bulk DD/POs. Cheque Writing. Interest and Dividend Warrants. Payments through ECS/RTGS/NEFT 

Payment Services 


Banks advise and conclude transactions on Exchange and Interest Rate Derivatives for their clients by using derivatives eg. Single currency interest rate swaps. Portfolio Risk Management Portfolio Monitoring Risk Modeling (Interest Rate Risk and Credit Risk Modeling) Actual-to-Expected Analyses Mining of Risk Drivers Underwriting Effectiveness Study


Banks these days provide Optimal asset allocation among a wide range of investment products to create a portfolio best suited to the customer s requirements and preferences, while maintaining the best balance between risk and return. The provide investment advisory service as well as investment on the customer s behalf in Fixed income products, real estate and insurance products, mutual funds, equity and IPOs. Banks have bancassurance partnerships with insurance companies so that customers can avail of the services of trained & certified professional consultants. Under this service, customers can receive real time information on the market movements, which includes commentary, commencing from the opening of the markets till the close of the day. The periodic commentary on the market would be at the time of opening, forenoon and closing. 

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