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Submitted in partial fulfillment of the

Requirements for the award of
Post Graduation Program in Business Management




Under the Supervision of

Mr. Sarvan Krishnamurthy, M.S. (Industrial Mgt), B.E. (Mech)


Kohinoor Business School
Old Pune-Mumbai Highway,
Khandala - 410 301.

This is to certify that Ms.Jothiswaroopini, a student of Post Graduation Program in

Business Management, 2007 – 09 batch has undertaken the project titled “ A study on
Foreign Exchange Operations in Union Bank of India, Chennai ” for a duration of two
She has successfully completed the above said project to the best of our satisfaction.

Prof. Sarvan Krishnamurthy Dr.B.P.Verma

Project Guide Director


Chapters Title Page Numbers

1 Declaration 4
2 Acknowledgement 5
3 Executive Summary 7
4 Industry Profile 9
5 Company Profile 14
6 Research Methodology 20
7 Treasury 22
8 Foreign Exchange 35
9 Exchange Rate Mechanism 64
10 Work Desk 72
11 Conclusion 81
Abbreviations 83
13 Bibliography 87


I, JOTHISWAROOPINI a Bona-fide student of Kohinoor Business School, Khandala,

hereby declare that the project titled “ A study on Foreign Exchange Operations in Union
Bank of India, Chennai ” in partial fulfillment of the requirements of the Post Graduation
Program in Business Management is my original work.

Date :

Place :



I am deeply indebted to Dr.B.P.Verma, The Director, Kohinoor Business

School, Khandala for having allowed me to carry out the project successfully.

I specially thank Mr. Sarvan Krishnamurthy, Assistant Professor,

Strategic Management for his constant guidance, professional help and support during
the course of the project.

I express my grateful thanks to Mr. Venkataramaiah, Chief Manager,

Human Resource Management for according me an opportunity to be associated with
Union Bank of India, Chennai. My deepest gratitude to Mr. Parthasarathy, Senior
Manager; Mrs. Suseela, Assistant Manager, Foreign Exchange; Mr. Santhosh,
Assistant Manager, Foreign Exchange for their immense help and cooperation to
permit me to complete this intensive project.




The Reserve Bank of India administers exchange controls in accordance with the
Government’s policy designed to maintain general control over the foreign exchange
situation, particularly outgoing financial flows. The Foreign Exchange Regulation Act
(FERA), 1973 confers powers to the Reserve Bank of India concerning foreign exchange
control. General or specific permission is required from the Reserve Bank of India for all
foreign exchange transactions. Foreign companies operating in India are governed by the
Foreign Exchange Regulation Act (FERA), 1973, which sets guidelines for bank
accounts, loans, foreign exchange trading and the remittance of dividends and profits.
The Asian Clearing Union (ACU) was established in 1974 under the auspices of the
Economic and Social Commission for Asia and the Pacific as a mechanism for settlement
of payments among participating countries’ central banks. The Reserve Bank of India is
one of the original participants. The other participants are Bangladesh, the Islamic
Republic of Iran, Nepal, Pakistan, Sri Lanka, and Myanmar. All authorized banks in India
can handle transactions cleared through the Asian Clearing Union. It is compulsory that
all eligible payments among participants be settled through the Asian Clearing Union.
In March 1993, the government ended certain FERA restrictions on domestic
borrowing, trading and acquisition of immovable property by companies with more than
40 % foreign equity. Residents may use up to 25 % of foreign exchange earnings to
maintain a foreign currency bank account in India. Foreign employees, liaison offices,
project offices and branches of foreign companies may open and use a resident bank
account in Indian currency provided that they have approval from the Reserve Bank for
operations in India.
In August 1994, the rupee was made fully convertible on the current account.
Rupee convertibility on the trade account is restricted by the negative list of imports and
exports and limited to those involved in trade. All export and import transactions are
conducted at the market rate of exchange.




The Indian Banking industry, which is governed by the Banking Regulation Act of India,
1949 can be broadly classified into two major categories, non-scheduled banks and
scheduled banks. Scheduled banks comprise commercial banks and the co-operative
banks. In terms of ownership, commercial banks can be further grouped into nationalized
banks, the State Bank of India and its group banks, regional rural banks and private sector
banks (the old / new domestic and foreign). These banks have over 67,000 branches
spread across the country.

The first phase of financial reforms resulted in the nationalization of 14 major banks in
1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in
a significant growth in the geographical coverage of banks. Every bank had to earmark a
minimum percentage of their loan portfolio to sectors identified as “priority sectors”. The
manufacturing sector also grew during the 1970s in protected environments and the
banking sector was a critical source. The next wave of reforms saw the nationalization of
6 more commercial banks in 1980. Since then the number of scheduled commercial banks
increased four-fold and the number of bank branches increased eight-fold.

After the second phase of financial sector reforms and liberalization of the sector in the
early nineties, the Public Sector Banks (PSBs) found it extremely difficult to compete
with the new private sector banks and the foreign banks. The new private sector banks
first made their appearance after the guidelines permitting them were issued in January
1993. Eight new private sector banks are presently in operation. These banks due to their
late start have access to state-of-the-art technology, which in turn helps them to save on
manpower costs and provides better services.

During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a
25 percent share in deposits and 28.1 percent share in credit. The 20 nationalized banks
accounted for 53.2 percent of the deposits and 47.5 percent of credit during the same
period. The share of foreign banks (numbering 42), regional rural banks and other
scheduled commercial banks accounted for 5.7 percent, 3.9 percent and 12.2 percent

respectively in deposits and 8.41 percent, 3.14 percent and 12.85 percent respectively in
credit during the year 2000.

The industry is currently in a transition phase. On the one hand, the Public Sector Banks,
which are the mainstay of the Indian Banking system, are in the process of shedding their
flab in terms of excessive manpower, excessive Non Performing Assets (NPAs) and
excessive governmental equity, while on the other hand the private sector banks are
consolidating themselves through mergers and acquisitions.

Public Sector Banks, which currently account for more than 78 percent of total banking
industry assets are saddled with non-performing assets (a mind-boggling Rs 830 billion in
2000), falling revenues from traditional sources, lack of modern technology and a
massive workforce while the new private sector banks are forging ahead and rewriting
the traditional banking business model by way of their sheer innovation and service. The
Public Sector Banks are of course currently working out challenging strategies even as 20
percent of their massive employee strength has dwindled in the wake of the successful
Voluntary Retirement Schemes (VRS) schemes.

The private players however cannot match the Public Sector Banks’ great reach, great
size and access to low cost deposits. Therefore one of the means for them to combat the
Public Sector Banks has been through the merger and acquisition (M& A) route. Over the
last two years, the industry has witnessed several such instances. The UTI bank- Global
Trust Bank merger however opened a Pandora’s box and brought about the realization
that all was not well in the functioning of many of the private sector banks.

Private sector Banks have pioneered internet banking, phone banking, anywhere banking,
mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various
other services and integrated them into the mainstream banking arena, while the Public
Sector Banks are still grappling with disgruntled employees in the aftermath of successful
VRS schemes. Also, following India’s commitment to the WTO agreement in respect of
the services sector, foreign banks, including both new and the existing ones, have been

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permitted to open up to 12 branches a year with effect from 1998-99 as against the earlier
stipulation of 8 branches.

Talks of government diluting their equity from 51 percent to 33 percent in November

2000 have also opened up a new opportunity for the takeover of even the Public Sector
Banks. The FDI rules being more rationalized in Q1FY02 may also pave the way for
Foreign banks taking the M& A route to acquire willing Indian partners.

Meanwhile the economic and corporate sector slowdown has led to an increasing number
of banks focusing on the retail segment. Many of them are also entering the new vistas of
Insurance. Banks with their phenomenal reach and a regular interface with the retail
investor are the best placed to enter into the insurance sector. Banks in India have been
allowed to provide fee-based insurance services without risk participation invest in an
insurance company for providing infrastructure and services support and set up of a
separate joint-venture insurance company with risk participation.

After the first phase and second phase of financial reforms, in the 1980s commercial
banks began to function in a highly regulated environment, with administered interest
rate structure, quantitative restrictions on credit flows, high reserve requirements and
reservation of a significant proportion of lendable resources for the priority and the
government sectors. The restrictive regulatory norms led to the credit rationing for the
private sector and the interest rate controls led to the unproductive use of credit and low
levels of investment and growth. The resultant ‘financial repression’ led to decline in
productivity and efficiency and erosion of profitability of the banking sector in general.

This was when the need to develop a sound commercial banking system was felt. This
was worked out mainly with the help of the recommendations of the Committee on the
Financial System (Chairman: Shri M. Narasimham), 1991. The resultant financial sector
reforms called for interest rate flexibility for banks, reduction in reserve requirements,
and a number of structural measures. Interest rates have thus been steadily deregulated in
the past few years with banks being free to fix their Prime Lending Rates (PLRs) and

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deposit rates for most banking products. Credit market reforms included introduction of
new instruments of credit, changes in the credit delivery system and integration of
functional roles of diverse players, such as, banks, financial institutions and non-banking
financial companies (NBFCs). Domestic Private Sector Banks were allowed to be set up,
PSBs were allowed to access the markets to shore up their Cars.

The growth in the Indian Banking Industry has been more qualitative than quantitative
and it is expected to remain the same in the coming years. Based on the projections made
in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan,
the report forecasts that the pace of expansion in the balance-sheets of banks is likely to
decelerate. The total assets of all scheduled commercial banks by end-March 2010 are
estimated at Rs 40, 90,000 crores. That will comprise about 65 per cent of GDP at current
market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at
an annual composite rate of 13.4 per cent during the rest of the decade as against the
growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that
there will be large additions to the capital base and reserves on the liability side.

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Brief history of the bank and its constitution :-

Prior to the Nationalisation of major banks in 1969, Union Bank was functioning
as a limited liability company with a Board of Directors elected by its share holders.
Union Bank was incorporated on 11th of November 1919, having its Registered Office in
Bombay. It was included in the 2nd Schedule to the Reserve Bank of India Act on 5th of
July 1935 and was granted a license under section 22 of the Banking Regulation Act,
1949 on 10th of December 1952. By 1969, Union Bank was well established in different
parts of the country. It was nationalized along with thirteen other major banks with effect
from 19th July 1969, under the Banking companies ( Acquisition and Transfer of
Undertakings ) Act, 1970. It is now a Corporation established by an Act of Parliament
with a common seal.

The bank came out with its maiden Initial Public Offering of 1800 lacs equity
shares of Rs. 10/- each at a premium of Rs. 6/- per share, in August 2002. The response to
this Initial Public Offer aggregating to Rs.288 crores (Rs. 180 crores + share premium Rs.
108 crores) was overwhelming and was over subscribed by 5.2 times. As a sequel to this
Initial Public Offer, Government of India holding is reduced to 60.85 % of the total
equity capital (Post IPO – August 2002) of the bank. The bank’s affairs are managed by
the chairman and Managing Director, as per the direction and control of the Board of
Directors constituted by the Government of India. Besides appointing the chairman and
Managing Director, the Government has also appointed an Executive Director for the
bank. Other directors on the Board include one director – each representing the Reserve
Bank of India, Government of India, the Bank’s officer staff, the Bank’s non-officer staff
and Nominated Directors.

After the IPO, the constitution of the Board of Directors will also include four
representatives of share holders. The bank continues to be a Scheduled Bank under the
Reserve Bank of India Act. It is required to maintain statutory minimum balances with
the Reserve Bank of India calculated on the basis of the bank’s Demand and Time

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Liabilities and is eligible for financial accommodation and other benefits as a Scheduled
Bank from the Reserve Bank of India.

It also continues to be an Authorized Dealer in Foreign Exchange and is

authorized to deal in all currencies. It continues to be subject to the supervision and
control of the Reserve Bank of India under the provision of the Banking Regulations Act
in regard to various matters such as inspection, opening and shifting of branches,
maintenance of statutory liquidity, and compliance with Directives of the Reserve Bank
of India in the matters of Income Recognition and Asset classification, Disclosure Norms
and preparation and audit of Balance sheet and Profit and Loss account etc. The bank also
continues to be an Insured Bank under the Deposit Insurance Corporation Act.

The bank is, however, free to set its own norms and rules and regulations in the
matter of granting of loans and advances, making investments, trading in securities,
formation of Deposit Schemes and pricing of its deposits and advances and other
services. The bank carries out this exercise through Assets and Liability Management by
collecting relevant data from branches and depending on the market conditions.

Union Bank of India is firmly committed to consolidating and maintaining its

identity as a leading, innovative commercial Bank, with a proactive approach to the
changing needs of the society. This has resulted in a wide gamut of products and services,
made available to its valuable clientele in catering to the smallest of their needs. Today,
with its efficient, value-added services, sustained growth, consistent profitability and
development of new technologies, Union Bank has ensured complete customer delight,
living up to its image of, “GOOD PEOPLE TO BANK WITH”. Anticipative banking-
the ability to gauge the customer's needs well ahead of real-time - forms the vital
ingredient in value-based services to effectively reduce the gap between expectations and

The key to the success of any organization lies with its people. No wonder, Union Bank's
unique family of about 26,000 qualified / skilled employees is and ever will be dedicated

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and delighted to serve the discerning customer with professionalism and

Organizational Set up :-
The revamping of the organizational set up of the bank started in 1997 – 98 is
now complete and the resultant 3 tier management structure as shown below is in place :
1. Central Management : Central ( corporate ) office including Field General
Manager’s Offices ( extended aim of Central Office )
2. Regional Management : Regional Offices in the field.
3. Branch Management : Branch Offices in the field.

The above three tiers of management constitute the bank’s management structure.
However, at present, three Zonal Offices are also functioning in the field at the following
centres and are reporting directly to the Central Office.
1. Ahmedabad – covering branches in the state of Gujarat
2. Pune - covering branches in the state of Maharashtra ( except branches under
Metropolitan Mumbai Zone ) and Goa.
3. Bhopal - covering branches in the state of Madhya Pradesh and Chattisgarh.

Central Office, Mumbai :

Central Office or Central Management is responsible for planning, policy
formulation, budgeting, finalization of accounts and liaisoning with the Government,
Reserve Bank of India, other financial institutions and other authorities.
It formulates Corporate Plans – long term as well as short term – in consultation
with Field General Managers and extends guidance / assistance to field functionaries in
implementing these plans.
The Managing Director, who is the Chief Executive of the bank, is directly
responsible to the Board of Directors for implementation of its policy decisions and
smooth running of the bank. He exercises overall control over the bank’s affairs with the
assistance of the Executive Director and other Executives. The corporate level functions
are appropriately grouped on functional basis for effective working and each of these

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groups is headed by a Top Executive. These groups are placed under the charge of
General Managers at coordinating level. The concerned General Managers report to the
Executive Director and evolve operational policies and programmes under the guidance
of the Executive Director / Managing Director. The Executive Director will report to the
Managing Director. The top Executive – in – charge of Vigilance will report on vigilance
matters directly to the Managing Director. The coordinating and functional level
Executives perform such duties and exercise such powers as may from time to time be
delegated to them by the Board of Directors or the Managing Director.

Field General Manager’s Office ( FGMO ) :

The Field General Manager’s Office is conceptualized to bring the Head Office
closer to the grass roots via its presence in the field. The role focus of Field General
Manager’s Office is designed to serve this basic objective without creating a tier.
The Field General Manager’s Office is responsible for
 Meeting competition
 Leadership support, challenges and development of the people in the field.
 Translating the corporate policies into practice, as well as providing feed-back
and suggestions on the update of the policies.
 Promote the culture of computerization and its effective utilization.
Field General Manager’s Office will conduct evaluation studies in various areas
of its operations with a view to bringing about qualitative shift in working of regions /
branches. They would render guidance, assistance and help to improve regional / branch

Regional Offices :
Branches have been grouped into Regions. Each identified Region will be under
the charge of a Regional Head – an executive in Senior / Top Management Grade. The
Regional Office or Regional Management level shall be directly responsible for
implementation of the policies of the bank controlling branch operations including
business development, branch expansion, sanctioning and follow-up of advances, etc. In
other words, Regional Office is the first controlling management tier for branches. It shall

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provide appropriate leadership to the branches to accomplish the Regional objectives. In
Lead Districts, Lead District Mangers shall be provided to undertake Lead
responsibilities. Those Regional Offices located in Lead Districts shall be additionally
responsible for Lead activities such as preparation of Annual Credit Plans and Annual
Action Plans for the District, monitoring of progress etc,.

Foreign Exchange business has emerged as an area of vital importance in the

development strategy of banks the world over. The rapidly expanding global market with
innovative financial products, presents challenging opportunities in international banking.

Union Bank of India commenced foreign exchange operations with a provisional license
in 1955. In the initial years, it utilized the services of The Chartered Bank Ltd., whose
systems were largely adopted when the full fledged authorized dealers license was
granted by Reserve Bank of India in 1956. The Foreign Division as it was then called,
was set up by experienced officials from foreign banks, including Mr.U.S.Prabhu and
Mr.J.B.Desai from the First National City Bank of New York Ltd., Robert J.Angus from
the National Westminster Bank Ltd., and others.

The quantum of Foreign Exchange business rose impressively during the sixties and
seventies, with the bank being awarded on more than one occasion, certificates of merit
from the Government of India, for its contribution to export development. The bank’s
expertise in the field of Foreign Exchange operations was acknowledged in the banking
industry with major banks deputing their officials to Union bank for training and

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The project study has been done with the help of Observation method. The value of
observation is that we can collect the original data at the time they occur. We need not
depend on reports by others. Another strength is that we can secure information that most
participants would ignore either because it is so common and expected or because it is
not seen as relevant. The third advantage of observation is that it alone can capture the
whole event as it occurs in its natural environment. Whereas the environment of an
experiment may seem contrived to participants, and the number and types of questions
limit the range of responses gathered from respondents, observation is less restrictive
than most primary collection methods. Finally, participants seem to accept an
observational intrusion better than they respond to questioning. Observation is less
demanding of them and normally has a less biasing effect on their behavior than does
Direct observation occurs when the observer is physically present and personally
monitors what takes place. This approach is very flexible because it allows the observer
to react to and report subtle aspects of events and behaviors as they occur. A weakness of
this approach is that observers’ perception circuits may become overloaded as events
move quickly, and observers must later try to reconstruct what they were not able to

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Credit Policy

Resources mobilization and deployment thereof in the most profitable manner within the
frame work stipulated by the Regulator i.e. the Reserve Bank of India are the main
functions of any bank. The major portion of the deployment of resources is through credit
dispensation and hence the returns thereon and safety thereof are of paramount
importance. Hence the policy of lending is formulated mainly from this angle. The policy
envisages, in the light of the dynamic and multifarious changes in the financial sector in
the recent past, as also the various directives issued by the Regulator during the
intervening period, a sustained growth plan of the advances portfolio. It is designed with
a focus on optimum usage of resources without compromising on the asset quality, the
strategies for deployment of credit, system of assessments, financial parameters, pricing,
prudential norms, risk management, etc,. It also indicates the chosen areas for credit
deployment, low priority areas, borrower standards, group approach, consortium
arrangements, geographical spread and sectoral deployment of credit.

The primary objectives of the credit policy are as under :-

 Ensuring the loan assets remain safe & secure,

 Ensuring the loan assets remain performing,
 Ensuring the profitable deployment of resources enduring Asset – Liability
matching and recycling of funds,
 Ensuring due compliance of regulatory norms, particularly Capital Adequacy
norm issues, Income Recognition, Asset Classification etc.,
 Ensuring balanced deployment of credit to various sector and geographical
regions, and
 Introduction of Risk Management concepts for credit portfolio in a scientific

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Chosen areas for Credit Policy :-

 Priority Sector lending

 Agricultural Sector
 Small Scale Industry
 Cottage Industries,
 Khadi Village Industries,
 Artisans and Tiny Industries, etc,.
 Weaker Section
 Credit to Women for upliftment and economic development
 Export Finance
 Software Developers and Service providers
 Credit to Midsized Corporates
 This includes both short term and long term requirements such as
Commercial papers, external commercial borrowing, foreign currency
loans, public deposits, private placement of debentures and bonds, etc,.
 The top corporate borrowers having good credit rating reduce their
dependence on bank finance and large limits sanctioned to them remain
unutilised to a great extent.
 Infrastructure Financing
 Activities involved in Infrastructure Financing are Roads, Ports, Power,
Telecom, Urban infrastructure facilities, Development of Industrial areas.

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Fund Based Credit Limit Non-Fund Based Credit Limit

1. Working Capital 1. Inland / Import Letter of

a. Secured Credit
facility a. DA basis
b. Unsecured b. DP basis
facility 2. Deferred Payment
2. Term Finance Guarantees
a. Secured 3. Letters of Guarantee

Managing Director and Executive Director are empowered to sanction credit facilities to
parties within their delegated authority without any ceiling as to fund based and non-fund
based limits. The maximum Fund based and Non-Fund based limits that can be
sanctioned to any single borrower is restricted to 9 times the Tangible Net Worth of the

Working Capital Term Loan ( WCTL ) is given to improve the current ratio and
reduction in margin will not fall within the ambit.

Working Capital :-

The most important aspect while preparing a credit proposal is working out the credit
requirement of the customer in the appropriate manner so that the funds placed at his
disposal are put to optimum use. The bank will have to make its own assessment of credit
requirements of the borrowers based on a total study of borrower’s business operations,
ie., taking into account the production / processing cycle of industry as well as the
financial and other relevant parameters of the borrowers.

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Methods to assess Bank Finance / Bank Credit :
1. Turnover Method
The working capital requirement under this method is to be computed on the
basis of 20 % of the projected annual turnover. In order to ensure that there is a
minimum margin by way of promoter’s contribution to support the working capital
needs, the borrowers are required to bring in at least 5 % of the projected annual
turnover as their contribution towards margin. The projected turnover has to be
interpreted as gross sales inclusive of excise duty. As regards 5 % of the promoter’s
stake, the same should be brought in by way of Net Working Capital and it is
expected that wherever the level of holding of Current Assets / Production /
Processing cycle is longer, then the borrower should bring in proportionately higher
stake in relation to his requirement of Bank Finance.

2. Flexible Bank Finance

Under the system, Fund based working capital requirement will be assessed as
the difference between Working Capital Gap and Projected Net Working Capital.
Though the benchmark for Current Ratio will continue to be 1.33 : 1, we may accept
some deviation in the same provided the Current Ratio is not less than 1.17 : 1 . In
cases where the Current Ratios have deteriorated on account of diversions taking
place because of short term funds flow to Fixed Assets, we may correct the position
by giving a Term Loan to be repaid within 12 to 36 months provided the Debt Service
Coverage Ratio, Debt Equity Ratio, and security coverage are at acceptable levels.
In the assessment method based on the Maximum Permissible Bank Finance
(MPBF) concept, the amount of working capital Finance is arrived at as a residual
source after netting off from the Working Capital Gap, the available Net Working
Capital or the required minimum Net Working Capital whichever is higher. The
projected bank borrowing which reflects the finance sought by the borrower, will be
validated as hitherto with reference to the operating cycle of the borrower, projected
level of operations, nature of projected build up of Current Asset / Current Liability,
profitability, liquidity, etc,. Where these parameters are acceptable, the projected

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bank borrowing will stand validated for sanction. This amount will be termed as
‘ Flexible Bank Finance ’.

3. The Cash Budget System

Presently Cash Budget method is in use for assessing working capital finance
for seasonal industries and for construction activity. In these cases, the required
finance is quantified from the projected cash flows and not from the projected values
of assets and liabilities. In this method of assessment, besides the cash budget, other
aspects like the borrower’s projected profitability, liquidity, gearing, funds flow etc,.
are also analysed.

Term Finance :-

A loan is termed as Term Loan when it has been sanctioned with an original
repayment period of not less than 36 months. The maximum period for repayment of
term loans other than Housing loans shall be normally 84 months (including moratorium
period). This may however, be increased to 180 months in respect of infrastructural
projects and other projects having long gestation periods. For Housing loans, the
repayments may be extended up to 240 months. Term lending institutions have generally
been assigned the responsibility of granting term loans to industries – both large scale and
small scale – for industrial purposes.
In considering the project feasibility, the following points may be taken into
1. Economic Feasibility.
Whether the project belongs to the priority sector and / or is likely to help
development of backward region(s). Whether it is social benefit oriented,
employment oriented or earner of foreign exchange; gestation period required in
relation to size of investments and benefits.

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2. Technical Feasibility
Technical know-how is required and its availability, the rate of technological
obsolescence of the proposed method and processes; evaluation of the proposed
location of the project in terms of availability of raw materials, power, fuel, labour.
3. Managerial Feasibility
Whether the promoters are entrepreneurs only or managers as well, the extent of
managerial experience possessed by them, whether they have any plans to ensure
sustained supply of managers through a programme of management education and
4. Organisational Feasibility
Whether a separate organization will be required for the project or it can be
accommodated within the existing internal control system like inventory control,
preventive maintenance and adequacy of organization structure, whether there is
proper training programme for apprentice, skilled labour and technical personnel and
organization arrangement to take care of this aspect.
5. Commercial Feasibility
Whether there is adequate arrangement for procurement of materials and services
and reasonableness of the terms of purchase; whether arrangements have been made
to obtain license from the State and Central Governments for foreign exchange,
capital issues, import of equipment and stress.
6. Financial Feasibility
Whether the firm undertaking the project is financially sound; assessment of fund
requirements till the project goes on stream such as capital expenditure, interest on
loans, working capital, initial expenses, return on capital employed, etc,.

Letter of Credit for purchase / import of raw material should normally be sanctioned to
customers, who have cash credit facility so that the payment can be made by debiting
cash credit etc,. If it is for capital equipments, the same should backed by a sanction of a
term loan otherwise backed by 100 % or 110 % cash margin. It can be either on DA basis
i.e. Deliverable against Acceptance or on DP basis i.e. Deliverable against Payment basis.

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Deferred Payment Guarantee Loan ( DPGL ) are issued normally for purchasing capital
equipments and hence such requests should be put to the same degree of appraisal
required for sanctioning Term Loan as the redemption of Deferred Payment Guarantee
will be associated with the return on employing the capital equipment covered by the
DPGL on the cash flow / profitability, Debt Equity Ratio, Debt Service Coverage Ratio,
etc., of the firm / company seeking the facility. Further adequate cash margin should be
insisted for such facilities.

Letters of Guarantee are issued for various purposes which take the form of performance
or financial guarantees. A guarantee which lays stress on the performance of certain act
like supply of a product, completion of any work, for achievement of certain level of
exports etc., will constitute a performance guarantee. A guarantee for discharge of only
the pecuniary liability of a third party on default will constitute a financial guarantee.
Since the Risk Weight for the capital adequacy purpose of financial guarantees is more,
the charges for the same are kept at a higher level than for performance guarantee for
which the Risk Weight is less.

Difference between Letter of Credit and Letter of Guarantee :-

The liability of Letter of Credit gets extinguished upon effecting the payment on
receipt of documents. The contingent liability ( consequently Capital Adequacy for the
Bank ) gets extinguished only on receipt of original Letter of Guarantee duly discharged
or at least letter of discharge, for which we have to get the guarantee bond returned by the
beneficiary and efforts should be made to get back the Guarantee bond or getting a letter
of discharge in the prescribed manner so that the bank need not maintain capital on the
expired guarantee(s).

Excess / Ad-hoc Powers :-

Excess may be interpreted as a facility of a temporary nature sanctioned for meeting the
temporary mismatches on cash flows of the borrowers for a period normally not

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exceeding 7 days, subject to availability of Drawing Power. Excess powers have been
given to all the delegates.

Ad-hoc may be interpreted as any facility, which is sanctioned for a period normally not
exceeding 3 months the need for which has arisen due to unexpected situation like receipt
of additional orders, increase in sales beyond projected level, short term mismatches in
cash flows, bunched receipt of raw materials, etc,. Ad-hoc powers have been given only
to the Regional Heads and above in the controlling offices and Branch Managers.

Credit Risk Management (CRM) :-

It has been introduced for effective control, monitoring and assessment of various
risks and distribution thereof amongst various sectors and segments. Credit Risk
Management system covers various aspects viz., Delegation of Powers, Prudential Limits
and Norms, Risk Rating System, Risk Pricing, Portfolio Management, Review
Mechanism Documentation and Legal Compliance.

Pre-requisites to be observed :-

 The borrowers should be the customers of the Bank and the Branch should have
reasonable experience of their dealings. It may, however, be possible that
prospective borrowers, in some cases may not be the customers of the Bank.
Branch Managers before sanctioning or recommending credit lines to such
prospective borrowers, should satisfy themselves as regards purpose of finance
and integrity or credit worthiness, etc,. of the borrowers.
 An appropriate application in writing as well as the prescribed Credit Information
Form will be obtained from the borrower.
 Every accommodation will be justified by the borrower’s past performance or
record of his dealings with the Bank and supported by a good Credit Report on
him. A Credit Report on the party will be compiled before granting any
accommodation. In case of a new connection which is a part of group, having
banking arrangement with other banks, satisfactory Credit Report, from the group

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bankers, should be obtained on overall activities and creditworthiness of the

Reasonable requirement for any new connection :-

Borrower Company should have

 Current ratio of 1.17 and above
 Debt Equity Ratio of less than 2 : 1
 Total outside Liabilities to Net Worth Ratio of less than 4 : 1, and
 Debt Service Coverage Ratio of 1.5 : 1

Different types of borrowers :-

1. Individuals
If the borrower is an individual, it should be ensured that he is not a minor,
that he / she is not of unsound mind, or that he / she is not an undischarged insolvent.
2. Joint Hindu Family
If the borrower is a Joint Hindu Family, prescribed Karta Form must be
obtained to bind the co-parceners and to secure their consent to all acts of Karta in
conducting the Bank account.
3. Sole Proprietorship Firms
If an individual carries on business under a trade name, a declaration of sole
proprietorship in the prescribed form must be obtained.
4. Partnership Firms
If the borrower is a partnership firm, it is preferable that it is a registered
partnership. Partnership letter in the prescribed form showing the names of all
partners should also be taken.
5. Limited Liability Companies
If the borrower is a limited company whether public or private, the date of its
registration must be noted from the Certificate of Registration which should be seen
and a copy may be kept on record. Under Section 293(1)(D) of Companies Act,

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Borrowings other than those of short term nature should not exceed its Paid up capital
and free reserves, unless authorized by the company in the General Board Meeting.
6. Co-operative Societies
In case of a co-operative society, its date of registration should be noted. Its
bye-laws should be examined to ascertain the borrowing powers and the permitted
7. Trusts
A trust may be created under a will or a deed of settlement duly registered. It
is an equitable obligation imposing on the Trustees, the duty of dealing with trust
fund over which they have control, for the objectives of the trust only.

Compilation of credit report on borrower :

 The creditworthiness of the borrower should be considered in relation to his

1. Character
He should be reliable and his integrity and business morality should be
2. Capacity
He should be capable of using the borrowed funds profitably and to repay
the same in due coarse for which he should have necessary experience and
3. Capital
He should have some definite stake in the business by investing his own
funds up to a reasonable percentage of the funds borrowed or proposed to be
borrowed. The repaying capacity of the borrower must be ascertained by
identifying the source of funds from which the borrower will be able to repay the
agreed installments or the entire amount of advance on due date as the case may
 In addition to obtaining the Credit Information Form duly filled in and signed by
the borrower, the Branch Manager should also obtain the following information
from the borrower.

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1. Latest Balance sheet, Trading and Profit and Loss Account together with the
break-up of Sundry Creditors, Debtors, Loans, Deposits and Advances.
2. Copy of last Income-Tax Assessment Order and latest Income-Tax Returns
supported by challans of Advance Income-Tax paid.
3. Copies of ‘ Proprietors / Partners / Directors ’last Wealth Tax Assessment
Orders and latest returns filed supported by challans of tax payment, if any.
4. Partners Capital Account and Personal Balance sheet
5. Details of payment of statutory dues.

Foreign Currency Loans are permitted

 To exporters for working capital needs
 To importers for meeting their import obligations
 To importers of capital goods
 To enable customers to prepay medium term Foreign Currency Loans, raised
earlier for meeting their capital expenditure from overseas financial institutions.
 To high value corporate clients of good track record to meet their working capital
requirements in Rupees in substitution of their existing Working Capital Demand
Loan (WCDL).

As extension of Foreign Currency Loan, exposes customers to exchange risk, the

customers are required to cover their exchange risk through Forward cover of
appropriate maturity. The credit decision in respect of the above categories of Foreign
Currency Loan is in the purview of the Central Advances Department which is based on
the prudential norms, credit discipline and credit monitoring guidelines in force. The
interest rate for such loans is the appropriate LIBOR plus the Bank’s spread. Any request
from customers of good track record for availing of Foreign Currency Loan in
substitution of Working Capital Demand Loan is to be referred to Central Office for their
approval. Central Office will permit extension of Foreign Currency Loans, based on
customers’ credit rating, track record and further business potential, after ascertaining the
availability Foreign Currency Resources, for the same from the International Banking

- 32 -
On receipt of the appropriate sanction for extension of Foreign Currency Loan,
the branch will inform International Service Branch (ISB), Mumbai, about customers
request for loan draw down giving two clear days notice and also confirming that
compliance of sanction terms and security documents have been obtained. International
Service Branch, after ascertaining the availability of funds and based on guidelines given
by International Banking Division, will convey their concurrence for draw down. The
branch has to report the transaction to International Service Branch if the loan is to be
converted to Rupee and obtain appropriate exchange rate (Buying T.T Rate) and also the
Interest rate applicable to the Transaction.

Repayment :- On maturity date, the customer has to repay the loan plus unpaid interest in
foreign currency. This is done by either purchasing foreign currency from the Bank at
selling T.T Rate or by tendering export documents for purchase in which case documents
can be purchased under FDBP (FCY) Scheme or by adjustment of proceeds of Export
documents sent on collection basis.

- 33 -


- 34 -
Foreign Exchange

Foreign Exchange as defined in Foreign Exchange Management Act (FEMA) 1999

means “ foreign currency and includes
 All deposits, credits, balances payable in any foreign currency ;
 Drafts, travellers’ cheques, letters of credit and bills of exchange expressed or
drawn in Indian currency and payable in foreign exchange; and
 Drafts, travellers’ cheques, letters of credit or bills of exchange drawn by banks,
institutions or persons outside India but payable in Indian currency ” .
Foreign Exchange does not involve trade and services alone, but also includes external
borrowing and investment.


International External
Trade Receipts and

1. Import 1. Current
Trade Account
2. Export 2. Capital
Trade Account

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Exchange Control Administration

The exchange control administration gets its statutory footing by virtue of the
Foreign Exchange Management Act (FEMA) 1999. Based on the Act, Government of
India and Reserve Bank of India ( acting as custodians of foreign exchange on behalf of
Government of India ) are empowered to issue notifications regulating foreign exchange
dealings to ensure its proper utilization. The instructions / guidelines of Reserve Bank of
India are administered through the Authorized Persons in foreign exchange.

Authorized persons are banks and institutions authorized by Reserve Bank of

India to deal in foreign exchange. Additionally, Reserve Bank of India has granted
“ money changers ” licenses to certain firms, hotels and other organizations permitting
them to deal in foreign currency notes, coins and travelers cheques.
 Full Fledged Money Changers are authorized to undertake both purchase and sale
transactions with public.
 Restricted Money Changers are authorized only to purchase foreign currency
notes, coins and travelers cheques, subject to the condition that all such
collections are surrendered by them in turn to authorized dealers in foreign
exchange / Full fledged money changers.

International trade is the movement of goods and services from one country to another.
The seller supplies the goods or services to the buyer and the buyer in turn pays for the
goods or services received from the seller. The payment for the international sale /
purchase amongst countries, each with their sovereign currently necessitates the supplier
and buyer agreeing to settle the transaction in anyone currency. International trade is
therefore is one of the primary reasons for the inflow and outflow of foreign exchange.
The law on the subject of Import and export from India is governed by the Foreign Trade
Development and Regulation Act 1992.

- 36 -

Import Trade Export Trade

Non – Fund Pre - Post -

Fund Based Shipment Shipment
Based Credit
Credit Facility

Import Trade

Import is defined as bringing into India any item by sea, land, air or through
electronic media. Control over import of goods into India is exercised by the Director
General of Foreign Trade (DGFT) under the Ministry of Commerce, Government of
India. The policy enunciated by this Authority is made available to the public through the
Export-Import (EXIM) Policy announced from time to time. Earlier the EXIM Policy
used to be announced annually. However, with effect from 1.4.1992, the Government of
India comes out with EXIM Policy valid for 5 years period to afford continuity and

For the purposes of import, the goods have been classified as ‘Freely importable
items’, and Negative items. The negative list is further categorized as (a) prohibited item,
(b) restricted items, and (c) canalized items. Goods falling under Freely importable
category can be imported by all, while items under restricted category can be imported
with a license. Items falling under prohibited category cannot be imported at all.
Canalized items can be imported only by Agencies approved by Government authorizing

- 37 -
import of such canalized items. The import of goods is controlled by Government of
India through Import Trade Control Regulations.

The Non – Fund Based Credit Facility is in the form of Letters of Credit. It contains an
undertaking by the bank to pay against presentation of prescribed documents conforming
to the terms and conditions stipulated in the Letter of Credit. Since the Bank relies on
goods being imported under Letter of Credit as a security for payment of relative bill, the
marketability of such goods, taking into account the licensing conditions, should also be
considered. The import licenses are issued in two copies :-
 ‘ Customer Copy ’ is for the purpose of clearing the imported goods through
customs, and
 ‘ Exchange Control Copy ’ is to facilitate remittance of foreign exchange on
respect of relative import bill.
The remittance in respect of an import bill must not exceed the CIF value ( Cost,
Insurance, Freight ) covered by Exchange Control Copy of Import License. If the import
bill is drawn on FOB ( Free on Board ) or C & F ( Cost and Freight ), the amount of
Insurance and Freight or Insurance, as the case may, be marked off in the value of license
and only the balance would be available for purpose of remittance.

The Fund based Import Finance generally takes the form of a back up limit to the Letter
of Credit limit sanctioned to a customer. Such limits are considered where import of
goods is made in Economic Order Quantities for use in production over a period of time.
However, in the normal course, whenever an import Letter of Credit is considered, it
should be ensured that the importer will have sufficient cash flow available to retire the
bills presented under the Letter of Credit, promptly. If that is not ensured, the Bank would
be forced to fund the transaction after crystallizing the foreign exchange liability.

Importer – Exporter Code Number

The importer must possess an ‘Importer-Exporter Code Number’ allotted
by Director General of Foreign Trade. Customs authorities will not allow any person to

- 38 -
import or export goods into or from India unless he holds a valid IEC number. The
following categories of organizations are exempted :
 Ministries / Departments of Central and State Government
 Import / Export for personal use not connected with trade / manufacturing /
 CIF value of single consignment not exceeding Rs.25,000 /-
 Indo-Myanmar border trades for CIF value of single consignment under Barter
Trade agreement not exceeding US $ 1000.
Categories of Importers :
Importers are broadly classified as under :
1. Actual user importer
2. Stock and sale importer
3. Private importer

For the purpose of licensing, importers are divided into the following broad categories :


Actual User Exporters holding

registration cum
membership (RCMC)

1. Industrial 1. Manufacturer
( AU[I] ) Exporter
2. Non-industrial 2. Merchant
( AU[NI] ) Exporter

‘Actual User’ means an importer who utilizes the imported goods for himself, may be
industrial or non-industrial.

- 39 -
Actual user ( Industrial ) means a person who utilizes the imported goods for
manufacturing in his own Industrial unit or manufacturing for his own use in other
Industrial unit including a jobbing unit.

Actual user ( Non-industrial ) means a person who utilizes the imported goods for his
own use in :
 Any commercial establishment carrying on any business, trade or profession; or
 Any laboratory, Scientific or Research and Development Institution or other
Educational Institution; or
 Any service industry ( includes an individual, firm, society, company,
corporation, or any other legal person ).

‘Registration cum Membership Certificate’ (RCMC) means a certificate issued by any

Export Promotion Council, Commodity Board or other registering authority designated
by Government for the purposes of export promotion. For Export Houses, Trading
Houses, RCMC will be issued by Federation of Indian Export Organisations (FIEO).

‘Manufacturer Exporter’ means a person who manufactures goods and exports or intends
to export such goods.

‘Merchant Exporter’ means a person engaged in trading activity and exporting or intends
to export such goods.

Time limit for settlement of Import Payments :-

In terms of the extant rules, remittances against imports should be completed not
later than 6 months from the date of shipment except in cases where amounts are with
held towards guarantee / performance etc. Authorized dealers may make remittances of
amounts so withheld, provided the earlier remittance had been made through them. No
payment of interest permissible on such withheld amounts. Accordingly, deferred
payment arrangements involving payments beyond a period of 6 months from the date of

- 40 -
shipment up to 3 years are treated as external commercial borrowings which require prior
approval of the authorized dealer branches.

Interest on Import Bills

Authorized dealers may allow payment of interest on usance bills or overdue
interest for a period of less than 3 years from the date of shipment. All in cost per annum
payable for the credit not to exceed LIBOR + 50 basis points for credit up to 1 year and
LIBOR + 125 basis points for credit for periods beyond 1 year but less than 3 years for
the currency of credit.

Import of Foreign Exchange

A person may –
 Send into India without limit foreign exchange in any form other than currency
notes, bank notes, and travelers cheques ;
 Bring into India from any place outside India without limit foreign exchange (
other than unissued notes ).

Letters of Credit

A letter of credit is an arrangement whereby a bank acting at the request of a

customer, undertakes to pay a third party by a given date, on documents being presented
in compliance with the conditions laid down. Letters of credit is also known as
‘Documentary credits.’

Parties to a letter of credit.

A letter of credit transaction normally involves the following parties :

1. Applicant / opener – The buyer of the goods ( Importer ) who has to make
payment to an overseas supplier.
2. Issuing Bank – The bank which issues the credit and undertakes to make the
payment on behalf of the applicant as per terms of the letter of credit.

- 41 -
3. Beneficiary – The seller of the goods (exporter) who obtains payment on
presentation of documents complying with the terms and conditions of the letter
of credit.
4. Advising Bank – Banks which advises the letter of credit certifying its
authenticity to the beneficiary and is generally a bank operation in the country of
the beneficiary.
5. Confirming Bank – A bank which adds its guarantee to the letter of credit opened
by another bank and thereby undertakes responsibility for payment / acceptance /
negotiation / incurring deferred payment under the credit in addition to that of the
Issuing bank. It is normally a bank operating in the country of the beneficiary and
hence its guarantee adds to the acceptability of the letter of credit to the
6. Nominated Bank – Bank specifically authorized by the issuing bank to make
payment etc. under the letter of credit.
7. Reimbursing Bank – Bank authorized to honour the reimbursement claim made
by the paying, accepting or negotiating bank. It is normally the bank with which
issuing bank has account from which the payment is to be made.
8. Transferring Bank – In a transferable letter of credit the first beneficiary may
request the bank authorized to pay, incur a deferred payment undertaking, accept
or negotiate, to transfer the letter of credit in favour of second beneficiary. Such a
bank is called transferring bank. In the case of a freely negotiable credit, the bank
specifically authorized in the letter of credit as a transferring bank, can transfer
the letter of credit.

Types of letters of credit :-

1. Revocable letter of credit.

A revocable letter of credit is one which can be cancelled or amended by the
issuing bank at any time and without prior notice to or consent of the beneficiary.
2. Irrevocable letter of credit

- 42 -
An irrevocable letter of credit is one which cannot be cancelled or amended
without the consent of all parties concerned.
3. Revolving letter of credit
A revolving letter of credit is one where, under the terms and conditions
thereof, the amount is renewed or reinstated without specific amendments to the
credit being needed.
4. Transferable letter of credit
A transferable credit is one that can be transferred by the original (first)
beneficiary to one or more second beneficiaries. When the sellers of goods are not
the actual suppliers or manufacturers, but are dealers / middlemen, such credits
may be opened, giving the sellers the right to instruct the advising bank to make
the credit available in whole or in part to one or more other beneficiary (ies).
5. Back to back letter of credit
When a middlemen enters into a contract to supply goods to be obtained from
other suppliers but is unwilling to disclose the identity of the buyer and the buyer
also is unwilling to open a transferable letter of credit. Actual manufacturer
supplier insists on payment against documents but the beneficiary of first credit is
short of funds, such back to back credits are opened. The beneficiary of the
original letter of credit will become the applicant for the second set of letter of
credit (back to back letter of credit).
6. Red clause letter of credit
Such letters of credit contain a clause which enables the beneficiary to avail of
an advance before effecting shipment to the extent stated in the letter of credit.
The clause used to be printed in red, hence the letter of credit is called Red Clause
letter of credit.
7. Green clause letter of credit
This is an extension of Red clause letter of letter, in that it provides for
advance not only for purchase of raw materials, processing and / or packing but
also for warehousing & insurance charges at the port pending availability of
shipping space.
8. Payment letter of credit

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Payment credit is a sight credit which is available for payment at sight basis
against presentation of requisite documents to the designated paying bank.
9. Deferred payment letter of credit
Deferred payment credit is an usance credit where, payment will be made by
designated bank, on respective due dates, determined in accordance with the
stipulations of th credit, without the drawing of Bill of Exchange.
10. Acceptance letter of credit
Acceptance credit is similar to deferred payment credit except for the fact that
in this credit drawing of a usance Bill of Exchange is a must.
11. Negotiation letter of credit
Negotiation credit can be a sight credit or a usance credit. A Bill of Exchange
is usually drawn in negotiation credit. In a negotiation credit, the negotiation can
be restricted to a specific bank or it may allow free negotiation, in which case it is
called as ‘Freely Negotiable Credit’ whereby any bank who is willing to negotiate
can do so.
12. Confirmed letter of credit
Confirmed letter of credit is a letter of credit to which another bank (bank
other than the issuing bank) has added its confirmation. This is to say, in a
confirmed letter of credit, the beneficiary will have a firm undertaking of not only
the issuing the credit, but also of confirming bank.
13. Standby credit
Standby credit is a documentary credit or similar arrangement however named
or described which represents an obligation to the beneficiary on the part of the
issuing bank to make payment on account of any indebtedness undertaken by the
applicant, money borrowed or for any default by the applicant in the performance
of an obligation.

Overdue Import Bills

If the import bills are not retired by the applicant, branches have to crystallize the
Foreign Currency amount into Rupee liability on the 10th day after the date of receipt of
documents in the case of demand bills and on the due date in the case of usance bills. If

- 44 -
the 10th day or due date happens to be a holiday / Saturday, crystallization shall be done
on the next working day.

Cancellation of letter of credit due to frustration of contract :-

Normally letters of credit issued by the banks are irrevocable letters of credit
which contain a firm understanding on our part and cannot be cancelled or amended
without the consent of the parties to letter of credit, particularly the beneficiary. If the
applicant approached the bank for cancellation of the letter of credit, bank has to first
give notice to the beneficiary through the advising bank about revocation of letter of
credit and obtain consent for cancellation. The original letter of credit has to be obtained
back for cancellation. Alternatively authenticated message from advising bank to the
effect that beneficiary’s consent has been obtained and original letter of credit held by
them duly cancelled is to be received by issuing branch. After obtaining consent of
beneficiary, reimbursement authority given to the reimbursing bank has to be revoked.

Export Trade

Exports from India should strictly conform to EXIM policy and exchange control
regulations. Every exporter has to apply for and obtain an Importer Exporter code
number. Application for Importer Exporter Code number shall be made to the Regional
Licensing Authority of the Director General of Foreign Trade ( DGFT ). Goods exported
must be those which can be exported freely or those under allocable quotas or those
covered by specific export licenses, in keeping with the Export – Import Policy in force.
Exports may be made under Export Promotion Capital Goods ( EPCG ) Scheme which
facilitates prior import of capital goods, subject to export obligation to be fulfilled over a
period of time.
Goods exported must be those, which can be exported freely or those under
allocable quotas or those covered by specific export licenses. Export invoices have to be
denominated and realized in freely convertible currencies. Deemed exports refer to
supply of goods within India to specified categories by main / sub contractors of goods

- 45 -
manufactured in India. Deemed exports are eligible for certain benefits as also pre / post
shipment export credit, etc.
Delay in submission of shipping documents by Exporters :
In cases where exporters present documents pertaining to exports after the
prescribed period of twenty-one days from date of export, authorized dealers may handle
them without prior approval of Reserve Bank of India, provided they are satisfied with
the reasons for the delay.
Exporters Caution List :
Reserve Bank may place exporters on Caution List for various reasons including,
huge amount of exports outstanding unrealized by the exporter/s. In such instances,
Reserve Bank of India will advise exporters that any further export by them will be
subject to prior approval of Exchange Control. Authorized Dealers may accept for
collection / negotiation of export documents from exporters who have been placed in
Caution List, only if the Exporter produces evidence of having received an advance
payment, or a letter of credit covering full value of the proposed Export.


Exporters should, in their own interest, arrange for insurance cover ( throughout
the voyage ) with seller’s interest clause permitting payment to them even in case of
exports made on Free On Board ( FOB ) or Cost & Freight ( C&F ) terms and not
covered by irrevocable Letters of Credit. Certain countries impose restrictions requiring
importers in their countries to obtain marine insurance cover from local insurers,
settlement under which in favour of exporters in India may not be permissible in the
event of cargo getting lost before reaching the port of destination, due to exchange
control regulations governing remittances against imports into those countries. Exporters
may in such cases avail of contingency marine insurance policies from New India
Assurance company etc., General Insurance company and its subsidiaries in order to
protect their interests till the goods are paid for claims on such policies will be payable
only to the exporter in India and such policies will not be assignable to overseas buyer or
any other party. In such cases, the insurance premium paid to New India Assurance

- 46 -
Company and other General Insurance companies will not be recoverable from overseas

‘Pre-shipment’ means any loan or advance granted or any other credit provided by a bank
to an exporter for financing the purchases, processing, manufacturing or packing of goods
prior to shipment, on the basis of letter of credit opened in his favour or in favour of some
other person, by an overseas buyer or a confirmed and irrevocable order for the export of
goods from India or any other evidence of an order for export from India having been
placed on the exporter or some other person, unless lodgment of export orders or letter of
credit with the bank has specifically been waived by Reserve Bank of India. Financial
assistance extended up to the time of shipping the goods is called Pre-shipment advance,
which is controlled in the books under the head ‘ Packing credit ’.
Packing Credit is an advance granted to an exporter or a sub-supplier for financing the
procurement of raw materials, processing, manufacturing, packing, transporting,
warehousing and shipping of goods meant for export. Packing Credit is generally granted
to an exporter who has an export order or Letter of Credit in his own name and will
actually export the goods. However, Packing Credit can also be granted to supporting
manufacturers or suppliers of goods who do not have export orders or Letters of Credit in
their own names but are exporting through merchant exporters or export houses. The
advance is granted against pledge or hypothecation of stocks to be processed / produced
to execute the export order.

Packing Credit contract or Letter of Credit wise loan (Rupee) account :-

1. The packing credit loan is normally given contract – wise, where a separate
account is maintained for each contract.
2. When disbursement is made in stages depending upon the need of the exporter, a
schedule of disbursement may be called for before granting the advance.
3. The relative export order or Letter of Credit in original against which the advance
is granted should invariably be endorsed on the reverse giving reference number,
under which the advance is granted, amount of advance etc., and should be

- 47 -
stamped and initialed by the officer. Entries should be made in the account of the
customer in the Packing Credit Ledger.
4. The details of the advance viz., contract order or Letter of Credit, date of advance,
amount of advance, expected date of shipment etc., should also be recorded in the
Contract – wise Register.
5. Due date of shipment is to be noted in the Due Date Diary for follow up purposes.
6. As far as possible amounts should be directly disbursed to suppliers of raw
materials, services etc., after taking necessary instructions from the borrower. If
trade practices call for cash payments to suppliers of raw materials etc., Packing
Credit advance can be credited to the operative account of the customer like CD /
CC accounts and disbursals there from are to be supervised to ensure proper end
Supervision of the Advance :-

Periodical inspection of stocks and books of the borrower must be undertaken to ensure
that the monies borrowed are in fact used for the purpose for which they were lent.
Inspection report must be prepared and sent to Regional Office as may be required. The
Packing Credit account should be backed by sufficient valid export orders / Letters of
Credit in addition to sufficient stocks to cover the advance and specified margin.
Inspecting officials should verify purchase invoices and mention to that effect be made in
the inspection report.

Repayment of packing credit :-

Packing Credit must be repaid from either one or a combination of any of the following
sources of export proceeds.
i. Proceeds of export bills negotiated, bills discounted, proceeds of bills sent on
collection basis for the contract or letter of credit for which packing credit has
been granted.
ii. Advance foreign inward remittances received from overseas buyer for the contract
by TT, cheque, DD, PO, etc.

- 48 -
iii. Undrawn balance remittance relating to any other earlier shipments.
iv. Rupee payment received from the merchant exporter confirming shipment of
goods with details of export order or letter of credit duly certified by the banker of
the merchant exporters.
v. Receipt of Foreign currency from foreigners during their visit to India evidencing
sale of goods or receipt of foreign currency by the exporter during his foreign visit
towards sale of goods / advance payment for export.
vi. Duty draw back received from Government agencies may also be permitted to be
credited to packing credit.
vii. Exporters may be permitted to repay packing credit advances from balances held
in their EEFC account to the extent exports have actually taken place.
viii. Exporters may be permitted to repay packing credit advances from balances held
in their EEFC account to the extent exports have actually taken place.

The exporters have an option

 To avail export finance at pre-shipment stage in rupees and then post shipment
credit either in rupees or in foreign currency.
 To avail pre-shipment credit in foreign currency and discount the export bills in
foreign currency at post shipment stage.

With a view to making credit available to exporters at internationally competitive rates,

authorized dealers have been permitted to extend Pre-shipment Credit in Foreign
Currency (PCFC) to exporters for domestic and imported inputs of exported goods at
LIBOR / EURO LIBOR / EURIBOR related interest rate.

Currency of Credit :-

Reserve Bank of India has permitted granting of pre-shipment credit in any of the
convertible currencies. However, for the present Pre-shipment Credit in Foreign Currency
is being granted in US Dollars, Sterling Pounds (GBP), and EURO subject to availability
of funds.

- 49 -
Pre-shipment Credit in Foreign Currency (PCFC) can be extended in one convertible
currency in respect of an export order invoiced in another convertible currency at the risk
and cost of cross currency transaction to the exporter.

Sharing of Pre-shipment Credit in Foreign Currency between Merchant Exporter and

Manufacturer :-

1. The rupee export packing credit is allowed to be shared between an Export Order
Holder (EOH) and the manufacturer of the goods to be exported. Branches may
extend Pre-shipment Credit in Foreign Currency also to the manufacturer on the
basis of the disclaimer from the export order holder through his bank. PCFC
granted to the manufacturer can be repaid by transfer of foreign currency from the
export order holder by availing of Pre-shipment Credit in Foreign Currency or by
discounting of bills. It should be ensured that no double financing is involved in
the transaction and the total period of Pre-shipment Credit is limited to the actual
cycle of production of the exported goods.
2. The facility may be extended where the banker or the leader of consortium of
banks is the same for both the export order holder and the manufacturer or, the
banks concerned agree to such an agreement where the bankers are different for
export order holder and manufacturer. The sharing of export benefits will be left
to the mutual agreement between the export order holder and the manufacturer.

Discounting Foreign Bills in Foreign Currency :-

1. The facility of Pre-shipment Credit in Foreign Currency will be self-liquidating in

nature. Generally, the Pre-shipment Credit in Foreign Currency should be
liquidated out of proceeds of export documents or submission for discounting /
rediscounting under the EBR scheme.

- 50 -
2. Any surplus amount available, (net of EEFC, if any) after full adjustment of
PCFC including interest, should be credited to the customer’s account at T.T
buying rate / forward rate.
3. Shortfall if any, in the delivery of foreign currency on discount of bills should be
recovered at T.T selling rate.
4. PCFC cannot be treated as a loan to be repaid in order to avail of post-shipment
credit separately.
5. The PCFC should not be liquidated with foreign exchange acquired from other
sources, except balances held in EEFC account of the exporter, to the extent of
exports already made.
[ Note :- If export takes place and the exporter does not wish to avail post
shipment credit for adjustment of pre-shipment advance and requests for
liquidation of the same by debiting his current account or EEFC account, his
request can be acceded to for adjustment of PC to the extent of shipment made
and handle export documents on collection basis. No penal rate of interest to be
levied for such liquidation. Sale of foreign currency for adjustment of PCFC in
such cases is allowed. ]
6. Pre-shipment Credit in Foreign Currency can also be liquidated out of rupee
resources of the exporter to the extent of exports have already taken place.

Export Letters of Credit :-

Branches are required to check the Letter of Credit for their authenticity and ensure
that the terms of the credit are not in violation of any exchange control regulations.
Further the terms of the credit should not contradict with one another and should contain
precise and unambiguous instructions. The following points are also to be verified :-
1. At times the Letter of Credit is made available for negotiation at the counters of
the Letter of Credit opening bank at a foreign centre. It means that the Letter of
Credit issuing bank would be liable to pay only if documents are drawn in
conformity with the terms of Letter of credit and reach its counters before the time
limit stipulated which the negotiating bank cannot guarantee.

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2. Some Letters of credit are initially provisional i.e., they become operative after the
occurrence of an event, such as, issue of import license to the applicant or after
receipt of aid or credit from development agencies like Asian Development Bank,
World Bank etc. Such Letters of Credit are purely provisional in nature and
become operative only after the receipt of the specific amendment from the
opening bank to that effect.

Advising Letters of Credit :-

In International trade, Letters of Credit are normally advised through banks operating in
the beneficiary’s country. If the beneficiary receives the Letter of credit directly, he will
not be able to establish its authenticity.
Letter of credit opening bank will utilize the services of their correspondent bank, which
will establish apparent authenticity and hand over the letter of credit to the beneficiary.

Cancellation of letter of credit :-

1. When issuing bank seeks to cancel letter of credit before due date, obtain
beneficiary’s concurrence for cancellation and obtain back the original letter of
2. Call for and file away the original letters of credit under advice to opening bank
or return the same to opening bank duly cancelled under stamp and signature.

Post-shipment finance is an advance normally granted to an exporter of goods and

services after shipment from India, till the date of repatriation of the export proceeds. The
advance may be against shipping documents or on the security of duty drawback or
export related receivables from Government of India.
Post-shipment finance is generally short-term working capital finance. However,
depending upon the credit terms e.g. deffered export, it can also grant for longer periods.
As a general rule in case of physical exports, post – shipment finance is extended to the
actual exporter who has exported the goods or to an exporter in whose name the export

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documents are transferred. Post shipment finance is also granted for deemed exports in
which the goods do not leave the country and the proceeds for demand exports are
received by the supplier in India itself.

Types of Post-shipment Finance :-

‘ Post-shipment’ finance is granted under the following heads.

1. Negotiation by payment / acceptance of export bill drawn under a Letter of Credit.
The negotiating bank will be entitled for re-imbursement of the bill
amount paid by it under the Letter of Credit, only if the bill negotiated strictly
conforms to the terms and Conditions of Letter of Credit.

2. Purchase / Discount of export bills drawn under confirmed contract / orders.

In respect of bills drawn under these arrangements, the bank has to look
primarily to the drawer – customer for repayment of advance in the event of non –
payment of bills, since re-import of relative exported goods ( if these goods are
lying uncleared at destination ) is quite expensive and the ultimate sale proceeds
in all probability would be disproportionately small in relation of the bill amount.
3. Advance against export bills sent for collection
At times, the exporter might have fully utilized his bills limit and in
certain cases the bills drawn under letter of credit may have some discrepancies.
In such cases the bills will be sent on collection basis. In some cases, the exporter
himself may request for sending the bills on collection basis anticipating the
strengthening of the foreign currency. Bank may allow advance against these
collection bills to an exporter.
Concessive rate of interest can be charged for this advance up to the transit
period in the case of DP bill and transit period + usance period + grace period (if
any) in the case of Usance bills. Beyond this period, the interest rate will be
subject to the various rates prescribed by Reserve Bank of India depending upon
the usance of the bill.

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4. Advance against export / goods sent on consignment basis.
Occasionally, goods exported are not on the basis of confirmed sale
contract / order, but only to be held at the destination by the other party (
consignee ) at the risk and responsibility of the exporter until they are sold. The
consignee at the destination can be an Agent of the exporter or exporter’s other
Branch / Office.
5. Advance against undrawn balance receivable.
Certain type of goods exported involve test / analysis at the point of
shipment and also at destination and allowance is required to be made, if the
quality / weight of goods ( eg. Oil seeds extraction ) is found to be lower than the
stipulations. To cover possibility of such allowances, the exporter is required to
draw bills only to the extent of certain percentage of the invoice value, leaving the
balance to be settled on the basis of test / analysis at the destination of goods.
Such undrawn balance is usually a small percentages, say 5 % to 10 % of invoice
value as may be permitted by Exchange Control at the relevant time.

Period and Notional Due Date :-

As per FEDAI guidelines, if export bills drawn in foreign currency are ‘at sight’ or ‘on
demand’ basis concessive rate of interest is applicable for the Normal Transit Period
(NTP) i.e., presently 25 days. In case of usance bills, concessional rate of interest as
directed by the Reserve Bank of India on export bills is applicable for the normal transit
period plus usance period e.g. A foreign currency bill payable at 60 days after sight will
be eligible for concessional interest rate for 60 days usance plus the normal transit period
of 25 days i.e., a total number of 85 days.

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Fixed Due Date :-

In case of export usance bills (foreign currency and rupee bills) where due dates are
reckoned from date of shipment or date of bill of exchange etc., no normal transit period
shall be applicable, since the actual due date is known.

Export Credit and Guarantee Corporation of India Limited (ECGC) :

The Whole Turnover Guarantee Schemes were introduced for providing cover to
the both packing credit advances and post shipment advances granted by all our branches
throughout India, in respect of losses which may be incurred while granting such
advances. The Guarantee cover provided by the Corporation covers the losses incurred by
bank while granting such advance to exporters on following counts :
 Insolvency of the exporter
 Protracted default by the exporter to pay the amounts due to the bank.
The Whole Turnover Guarantees (WTPCG and WTPSG) does not cover packing credit
advances granted to following clients :
 Public Sector Undertakings wholly owned by Government of India
 Packing credit advances for exports on deferred payment terms, and export of
construction and services.
(Advances for the above category of borrowers will be covered by ECGC on specific
application being made under Individual Packing Credit Guarantee scheme).

The transport documents that are normally tendered by the exporters are :

1. Bill of Lading (BL)

The Bill of Lading, issued by shipping company, is a document of title to
goods. Bill of Lading is normally issued in more than one original and delivery of
goods can be taken on any single original negotiable copy. The date of shipment
shown in the bill of lading should not be later than the date stipulated in the letter
of credit as last date for shipment. The date on which the goods are placed ‘on
Board’ is treated as the actual date of shipment. Bill of Lading should clearly

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indicate ‘Freight Paid’ or ‘Freight Payable at destination’ as the case may be. If
the value of goods as per letter of credit is Cost, Insurance, and Freight (CIF) or
Cost and Freight (C&F), bill of lading must show ‘Freight Paid’, and if on Free on
Board basis, it must show ‘Freight Payable at destination’.

2. Airway Bill (AWB)

Airway Bill is an acknowledgement issued by an Airline company or their
authorized agents (and not forwarding agents) stating that they have received the
goods detailed therein (number of packages, quantity and nature of goods) for
dispatch by Air to the named consignee at the address stated therein. Unlike a bill
of lading, Airway bill is not a document of title to goods because it is merely an
acknowledgement of goods. When it is not a title to goods, naturally it is not a
negotiable document.

Air Consignment Note :-

It is otherwise called as Air Receipt. This is issued generally by forwarding
agents. This document shows the departure and the destination stations as well as
the name of the shipper and the addressee. It must also indicate forwarding station
and date stamp. This document also gives the description of goods etc., and their
apparent good order and condition.

3. Post Parcel Receipt (PPR)

As the name indicates, it is a receipt issued by postal authorities. It can be a Sea
Mail receipt or Airmail receipt depending upon the mode by which they are sent.
Postal receipt is also an acknowledgement of receipt of goods for delivery to a
named consignee hence, it is not a document of title to goods nor is it a negotiable
instruments. Though the postal receipt is not a must for taking delivery of goods
in certain countries, receipt must be shown to the customs and postal authorities
for clearance and delivery postal regulations in certain countries allow senders to
issue and authenticate their own certificates of posting. Considering all these, it is
not considered a safe document from the banker’s point of view.

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Negotiation of Export bills drawn under irrevocable letter of credit :-

When an overseas bank opens a letter of credit at the instance of its customer in
favour of an exporter for import of goods, it irrevocably commits itself to honour the
drawing of the exporter, subject to the condition that all the terms stipulated in the letter
of credit are complied with. Exporters from India are governed by the trade control and
the FEMA guidelines. Therefore the bank, which negotiates a bill drawn under a letter of
credit, has to ensure strict compliance not only with the terms and conditions of the letter
of credit but also that there is no violation of the above-mentioned regulations. This also
applies to cases where export bills have been purchased without the backing of a letter of
credit or are taken for collection only.

Escrow accounts :-

Escrow accounts is a mechanism for settlement of payment for imports into India and for
exports from India under ‘counter trade’ arrangements entered into between Indian
parties and their overseas counterparts. ‘Counter trade’ means any arrangement under
which exports / imports from / into India are balanced either by direct import / export
from the importing / exporting country or through a third country under a trade
arrangement or otherwise. Export / import under counter-trade may be carried out
through Escrow account, buy-back arrangements, barter trade or any similar arrangement.
The balancing of exports and imports could wholly or partly be in cash, goods and / or
services. Escrow accounts are funded by proceeds of imports made by Indian parties and
the funds in these accounts are utilized for payment to them for their exports under
counter-trade arrangements. Under the Escrow accounts mechanism, the overseas
importer / exporter are common whereas the Indian importer and exporter may be
Packing credit and post shipment finance can be made available to exporters under
counter trade arrangements. The rates of interest will be as per Reserve Bank of India
interest rate structure. Whenever an exporter receives advance payment either direct or
through Escrow account, the pre-shipment credit should be curtailed to the extent of

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amount of advance received. Normally pre-shipment advance under Escrow account
Reimbursement Mechanism should be given only against letter of credit opened by the
bank maintaining escrow account. If importer does not open letter of credit, but only
places a confirmed order providing for reimbursement to the debit of Escrow account,
branches should forward copies of the confirmed orders to the bank maintaining Escrow
account and obtain confirmation from them that reimbursement will be made on due
presentation of export documents. The Escrow account maintaining bank should also
specify the details of documents required by them for honoring the reimbursement claim
pre-shipment finance should be granted only thereafter.

Crystallization :-
The proceeds of all export bill negotiated / purchased / discounted should be
repatriated on or before due date. The branch will transfer the exchange risk to the
exporter by crystallizing the foreign currency liability into rupee liability on the 30th day
after the normal transit period / notional due date or actual due date whichever is earlier.
In case the 30th day falls on a holiday / Saturday, the crystallization will be done on the
next working day. For crystallization into Rupee liability, the branch will report notional
sale to the Dealing room and crystallize the bill at T.T selling rate. If the crystallized
Rupee liability is more than the amount originally advanced, branches will not pass on
the surplus to the customer. If the crystallized Rupee liability is less than the amount
originally advanced branches will recover the shortfall from the customer. For bills
crystallized which are more than Rs.25.00 lacs, a monthly statement is to be sent to
International Banking Division.

Realisation on or after notional due date / actual due date but before crystallization :-
 Debit or Credit the shortfall / excess amount received ( excess may be
representing interest or other charges etc. collected ) to the customer’s account.
 Charge overdue interest from notional due date to the value date.
 If in case of usance bills, if actual due date falls before notional due date,
originally charged interest from actual due date to notional due date is to be

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Write off of unrealized Export Bills :
An exporter who has not been able to realize the outstanding export dues despite
best efforts, may approach the authorized dealer, who had handled the relevant shipping
documents, with appropriate supporting documentary evidence with a request for write
off of the unrealized portion. Authorized dealers may accede to such requests subject to
the under noted conditions :
a) The relevant amount has remained outstanding for one year or more;
b) The aggregate amount of write off allowed by the authorized dealer during a
calendar year does not exceed 10 % of the total export proceeds realized by the
concerned exporter through the concerned authorized dealer during the previous
calendar year;
c) Satisfactory documentary evidence is furnished in support of the exporter having
made all efforts to realize the dues;
d) The case falls under any of the under noted categories:
i. The overseas buyer has been declared insolvent and a certificate from the
official liquidator indicating that there is no possibility of recovery of
export proceeds produced.
ii. The overseas buyer is not traceable over a reasonably long period of time.
iii. The goods exported have been auctioned or destroyed by the
Port/Customs/Health authorities in the importing country.
iv. The unrealized amount represents the balance due in a case settled through
the intervention of the Indian Embassy, Foreign Chamber of Commerce or
similar Organization.
v. The unrealized amount represents the undrawn balance of an export bill
(not exceeding 10 % of the invoice value) remained outstanding and
turned out to be unrealizable despite all efforts made by the exporter.
vi. The cost of resorting to legal action would be disproportionate to the
unrealized amount of the export bill or where the exporter even after
winning the court case against the overseas buyer could not execute the
court decree due to reasons beyond his control.

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vii. Bills were drawn for the difference between the letter of credit value and
actual export value or between the provisional and the actual freight
charges but the amount have remained unrealized consequent on
dishonour of the bills by the overseas buyer and there are no prospects of
e) The case is not the subject matter of any pending civil or criminal suit.
f) The exporter has not come to the adverse notice of the Enforcement Directorate or
the Central Bureau of Investigation or any such other law enforcement agency.
The exporter has surrendered proportionate export incentives, if any, availed of in respect
of the relative shipments. Documentary evidence regarding surrender of incentive

Export documentary bills for collection :-

 Foreign bills collection business is accepted by the bank only on the condition
that the bank is not liable for loss, damages or delay, howsoever caused, except
directly due to the negligence or default of its officers / employees. Bank is also
not responsible for acts of omission or commission of its agents / correspondents
and for the consequential losses / delays.
 The establishment of these conditions is a necessary protection against the serious
risks to which the bank would otherwise be exposed for no fault of its own in the
``conduct of such business. It is essential to be able to prove that the customer is
aware of these conditions and that, by implication, he accepts them.
 When the bank accepts export bills on collection basis, the customer is given
credit only after the bills are realized. Though exporter is primarily responsible
for repatriation of export proceeds, bank also has to take all reasonable
precautions / steps for realization of bills.

Exchange Earners Foreign Currency Account :

Exporters and beneficiaries of Inward Remittances in convertible foreign
currencies are permitted to open and maintain foreign currency denominated accounts
entitled EEFC Account. Funds can be credited to EEFC account only on realization of

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export proceeds / receipt of inward remittances. EEFC funds can be utilized for all
permitted current account transactions as permitted under FEMA. EEFC account can be
maintained in the form of non-interest bearing current account only.

The country’s external receipts and payments can be classified broadly under
 Current account, and
 Capital account.


Current Capital
Account Account

1. Merchandise 1. External
trade borrowings
2. Invisibles 2. External
3. External

Current Account can be further divided into merchandise trade and invisibles. The
merchandise trade comprises of export and import of goods / services, difference between
which is commonly referred to as balance of trade. Invisibles refer to current international
payments for other than merchandise trade and includes travel, transportation, interest,
dividend, etc,.

The difference in the external receipt and payment on these two counts jointly gives the
current account surplus or deficit.

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Capital Account includes transfers connected with external borrowings, external
investments or disinvestments. External borrowings of the Government of India,
commercial borrowing from abroad, foreign investments, non-resident deposit, etc., form
part of the capital account.

‘ Capital Account Transaction ’ means a transaction which alters the assets or liabilities
including contingent liabilities outside India of persons resident in India or assets or
liabilities in India of persons resident outside India.

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The rate at which one currency is converted into another is called the exchange rate.
There are two methods of quoting the exchange rate.
1. Direct Method
2. Indirect Method
A given number of units of local currency for a unit of foreign currency is the ‘Direct
Method’ for quoting exchange rate e.g. USD 1 = Rs.48.30. In the Direct method, home
currency is variable. However, certain foreign currencies are quoted for 100 units, since
their one unit value is less than one Rupee e.g. Japanese Yen, Indonesian Rupiah, Kenyan
Shilling, etc,. In the ‘Indirect Method’ of quotation, the variable is the foreign currency
expressed in a fixed unit of home currency. For e.g. Rs. 100 = USD 2.4272.

Purchase Transactions
In a purchase transaction, the bank receives foreign exchange.
Example :
1. Export – Bank gets or buys the foreign exchange from the exporter and pays
equivalent Indian Rupees.
2. Tender of foreign currency notes / traveler cheques / DD / cheques by a customer.

Sale Transactions
In a sale transaction, the bank parts with foreign exchange.
Example :
1. Import – Bank delivers foreign exchange against Indian Rupees paid by the
2. Issuance of Telegraphic Transfer (TT) / DD payable abroad.

Types of Rates :
All purchase / sale transactions are not alike and hence attract different rates. The
different types of rates are as below :

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Purchase Sale
TT Buying TT Selling
OD Buying (Bill Buying Rate) BC Selling (Bill Selling Rate)
TC Buying TC Selling
Currency Note Buying Currency Note Selling
The foreign exchange quotation will also be determined by the date of delivery i.e. the
date on which the transaction is completed. The delivery under a foreign exchange
contract can be made in one of the following ways :
 Ready for cash : Delivery on the same day i.e., on the deal date
 TOM : Delivery made on the next working day after deal date
 SPOT : Delivery on the second working day after deal date
 Forward : Delivery subsequent to SPOT date.
‘Forward Rates’ are quoted either at a higher ( premium ) or lower ( discount ) rate than
the spot rate. This is because in a free exchange market, the rates would be based on
demand and supply, with the currency in excess supply tending to be cheaper and a
scarce one costlier. Further, the exchange rate is also connected to the cost of funds
(interest) in respective countries. In a totally free market, the premium / discount on
forwards would be difference in the interest rate in the two countries. Currencies with
higher interest rates tend to be priced at a discount while currencies with lower interest
rates at a premium. Always premium will be added to and discount deducted from the
spot rate to arrive at the forward rate in the case of direct quotation.

Computation of Rates :
The bank is a trader in foreign exchange and hence the purchase / sale are not
effected at the same rate. The purchases are made at a lower price and the sale at a higher
price, with the differentiated being the exchange profit. In the foreign exchange market,
quotations are always ‘two-way’ i.e., for both buying and selling. The ‘two way’ quote
for U.S.Dollar would appear as USD 1 = Rs. 41.20 / 21 where the buying rate is
Rs. 41.20 and selling rate is Rs. 41.21. The buying rate is known as the ‘Bid’ rate and the
selling rate as the ‘Offer’ rate.

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Base Rate
Base rate is the rate derived from ongoing market rate, based on which buying /
selling rates are quoted for merchant transactions. The inter bank rates are normally for
spot deliveries. Hence, for quoting rates for merchant transaction on cash basis (i.e. Value
Today), the base rate will be adjusted to the extent of cash / spot differences.

Spread is the difference between TT selling rate and TT buying rate of a given
currency. In line with the business maxim of ‘Buy Low Sell High’ while arriving at the
merchant rate the exchange margin is reduced from the base rate in case of purchases and
added on for sale transactions in the case of direct quotation.

Cross Rate
The U.S.Dollar being the most commonly denominated currency in international
trade is the intervention currency where a quotation in Rupee has to be given for a
currency other than the U.S Dollar. The cross rate is worked out as follows :
1 USD = Rs. 41.20 1 USD = CHF 1.4850
Therefore, 1 CHF = Rs. 27.74

Forward Contracts
There is an inherent ‘Exchange Risk’ in an international trade transaction
denominated in a foreign currency, as an advance movement in the exchange rate may
reduce the realization of home currency for an exporter or increase the cost for an
importer. To reduce this exchange risk for a transaction to be concluded at future date,
‘Forward Contracts’ are booked. It is a mechanism through which the rate is fixed in
advance for purchase or sale of foreign currency needed at that future date. FEDAI has
defined Forward Contract as a contract deliverable at a future date, duration of the
contract being computed from spot value date at the time of transaction.

Forward contract is an agreement to exchange one currency for another currency

on a specified date in future, at a pre-determined exchange rate, set at the time the

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contract is made. The contract locks in an exchange rate and regardless of what the
exchange rate may be on the future date, the transaction will be put through at the
contracted rate.

Types of Forward contracts :

Forward contracts can broadly be classified as ‘Fixed Date Forward contracts’
and ‘Option Forward contracts’. In fixed date forward contracts, the buying / selling of
foreign exchange takes place at a specified future date i.e. a fixed maturity date. The
foreign exchange cannot be received / delivered prior to / after the predetermined date.
The option Forward contract is entered into in order that the customer gets the flexibility
to receive / deliver the foreign exchange on any day during a specified period.

Derivatives are instruments whose value is based on or derived from prices of
currencies, commodities, interest rates, share indices etc,. Financial derivatives were
designed in view of the need to hedge risks caused by volatility in exchange rates and
interest rates. The forward contract can also be considered as a derivative instrument as
the value is derived from spot exchange and interest rates.

Foreign Currency Option

A foreign currency option contract is an agreement between two parties which
provides the purchases with the right, but not obligation to buy or sell a fixed amount of
currency at an agreed exchange rate known as the strike or exercise price. A right to buy
a specified currency is known as a call option and a right to sell a specified currency is
called a put option. A currency option protects against downside risks and at the same
time, provides an opportunity to participate in profit, if the exchange rate moves
Example :
A customer has to make the payment of EUR 500,000 in three months but has
only USD funds with him. He would like to restrict the payment to not more than USD
1.20 per EUR. Hence he buys a call option on the EUR at the exercise or strike price of

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USD 1.19 paying a cost (premium) of USD 0.25 (spot rate is 1 EUR USD 1.19). on due
date, if the EUR is USD 1.25 he exercises the option, if it is USD 1.15, he allows the
option to expire and buys EUR in the open market.
When the strike price in relation to the currency market rate is favourable to the
buyer, it is referred to as ‘in the money’, when the strike is not favourable it would be
‘out of the money’ and when the strike price is equal to current price, it is known as ‘at
the money’. An option which can be exercised at any time until the expiry date is called
an American Option. An option which can be exercised only on expiry date, is called an
European Option.

RBI has permitted banks to offer cross currency options to customers with an
exposure to exchange risks in specific transactions. The option should be written on a
fully covered basis by buying an identical option for the same amount, same or
favourable strike price and maturity. The option contracts are booked subject to
customer’s declaration that they have not already booked / will not book foreign currency
forward cover / currency option for the same transaction.

Foreign Currency – Rupee Swaps

RBI has permitted banks to arrange foreign currency rupee swarps between
corporates, who have exposures arising out of these long-term foreign currency
commitments. Entities, who do not have any forex exposure but are willing to assume
forex liability in lien of the long term rupee liability may also become counter parties in
the arrangement. Banks may enter into foreign currency rupee swaps between entities to
assist the exchange of such obligations between them and absorb the residual currency /
interest mismatches within their open position / gap discipline.

A swap has been defined as an exchange of payments in one currency for a stream
of payments in another currency over a period of time.

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The banks in India have also been permitted to offer the following products to Indian
Corporates for hedging their foreign currency loan liabilities:
1. Currency Swaps
2. Interest Rate Swaps
3. Forward Coupon Swaps
4. Interest rate cap / collars (purchase)
5. Forward Rate Agreements

Currency Swaps
Under a currency swap, two counterparties agree to exchange the different
currencies at the outset and repay them in the future. There may not be any exchange of
currencies but only the servicing payments are swapped. A currency swap completely
converts a long term liability or asset in the currency to a long term liability, or asset in
another currency.
For example :
A company with U.S.Dollar income has borrowed in Japanese Yen for 5 years.
The company enters into a swap arrangement through its bank, whereby the bank
provides the Yen necessary to cover the loan liability in exchange for US Dollars which
the company delivers.

Interest Rate Swap

An interest rate swap is a contract between the customer and the bank to exchange
two different interest rate cash flows, one usually determined on a floating rate basis and
the other on a fixed rate basis. The interest rate swap enables customers to convert one
kind of income / payment stream for another kind of income / payment stream.
For example :
If customer has a floating rate debt and perceives interest rates moving up the
floating rate can be swapped for a fixed rate to eliminate the exposure to an increase in

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Forward Coupon Swaps
A coupon swap is a form of interest rate swap where there is an exchange of fixed
rate for floating rate.

Interest Rate caps / collars

A cap is an agreement between two parties which limits interest rate exposure to a
maximum rate for a defined period of time.
A floor is an arrangement which maintains interest rate income to a minimum rate
for a defined period of time.
A collar is an arrangement whereby one party buys one cap and sells one floor
simultaneously so that the cap rate is higher than the floor rate.
In a collar, a borrower can buy a cap (to protect against a risk in rates) and
simultaneously sell a floor with a lower strike rate. The floor would result in loss of
benefits of lower interest rates if the fall is below the floor strike rate. The cost of the
collar for the customer is generally the premium charged for the cap and the premium
received for the floor.

Forward Rate Agreements (FRAs)

A Forward rate agreement is a forward contract on interest rate. It allows the
buyer to fix an interest rate for a specific future period, enabling him to accurately
estimate the future cash flows. The forward rate agreement is used to hedge against future
interest rate movements.
For example :
The agreed six month LIBOR rate of interest on a Forward rate agreement is
1.25%. If LIBOR is 1.35 %, the bank will pay the difference 0.10 % to be borne by the
customer. However, if the LIBOR rate is 1 % the customer will pay the 0.25 %,
difference to the bank. The interest cost in both the cases remains at 1.25 % for the

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Transaction - I
Import Bill for collection ( Usance bill )
 ABC Company Ltd (Importer) submits its Letter of Credit which has expiry date
of 8th July 2008 and to be paid in US Dollar, for e.g. US $ 10,000.
 Once the UBI – Forex receives documents from the exporter, it will send the
confirmation to the exporter’s bank, in this case it is Standard Chartered Bank
through SWIFT for receiving the said documents.
 In turn, the customer (ABC Company Ltd) will send an acceptance letter to UBI –
Forex for agreeing to pay the bill amount to his exporter on the due date.
 UBI – Forex will retain copies of the following documents and will return all the
documents in original to the customer – importer.
 Covering letter from ABC Company Ltd’s bank,
 Bill of Lading,
 Invoice, and
 ABC Company Ltd’s acceptance letter.
While UBI – Forex returns all the documents in original to the customer –
importer, he should give his signature on the UBI-Forex ’s copy stating “Received
Original” .
 On the due date (8th July 2008), UBI-Forex will make the payment of US $
10,000 in INR, converting it at the prevailing exchange rate on that day.
 While making the payment, UBI-Forex will charge letter of credit charges and
SWIFT charges to the customer – importer.
 UBI-Forex will make the payment to the exporter to whom ABC Company Ltd
has to pay though there will be no funds available in the customer – importer’s
current account, and it will charge OD charges in ABC Company Ltd’s account
from the due date till the date he deposits the funds in his current account.

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Transaction - II
Import Bill for Collection ( Sight Bill )
 STU Company Ltd ( Importer ) has entered into a contract with PQR International
Ltd, United Kingdom to import certain goods from them. The contract is on ‘at
sight’ basis.
 Once UBI-Forex receives the documents amounting US $ 142,199.25 from the
exporter – PQR International Ltd, it will intimate the receipt of the same to the
 STU Company Ltd ( Importer ) will arrive at UBI-Forex with a letter requesting
for “Release of collection documents” .
 UBI-Forex will receive the entire bill amount from STU Company Ltd, and it will
retain the service charges ( say US $ 30 ).
 It will remit US $ 142,169.25 to PQR International Ltd, United Kingdom through
SWIFT by converting the same into INR at the prevailing exchange rate.
 UBI-Forex will give away all the documents in original to STU Company Ltd.

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Transaction – III
Inland Bill Discounted
 LMN Ltd ( buyer of the goods) entered into a letter of credit with UBI Allahabad
branch to pay Rs.25,00,000 to XYZ Ltd, Chennai ( seller of the goods ) through
UBI-IFB, Chennai branch on the due date.(in this case it is 13th September 2008 ).
 With the full consent from LMN Ltd, XYZ Ltd presents the bill at UBI-IFB
before the due date ( for e.g. on April 22, 2008 ).
 UBI-IFB will communicate this movement to UBI, Allahabad branch.
 With their approval in writing to pay XYZ Ltd before the due date, UBI-IFB will
issue pay order to XYZ Ltd.
 The commission for pay order, and the interest from the date of crediting the
funds to XYZ Ltd ( in this case, it is April 22, 2008 ) till the due date ( here it is
13th September, 2008 ) will be calculated and intimated to the UBI, Allahabad
 On the due date, these additional charges and the amount credited to XYZ Ltd
will be transferred from UBI Allahabad branch to UBI – IFB.
 UBI, Allahabad branch will claim these amounts from LMN Ltd.
 If LMN Ltd does not make the payment to UBI, Allahabad branch on the due
date, they will charge OD charges in LMN Ltd’s account from the due date till the
date LMN Ltd makes the payment.

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Transaction – IV
Free of Payment ( F.O.P) Bill
 Company A receives an export order from its Germany customer
 The Germany customer makes the full payment of EUR 20,390 to Company A on
March 28, 2008 well before dispatching the goods from the Indian Port.
 The bank will get this amount as Inward Remittance and the same will be reported
to the Reserve Bank of India.
 Company A dispatches the goods on April 02, 2008 to Germany, it will submit
the following documents to the bank
o Commercial Invoice
o Packing List
o Bill of Lading
o Shipping Bill for Exports – Exchange Control Copy
 The bank has to link that Inward Remittance with the Free of Payment Bill to
show that the funds were received against these goods, and this will again have to
be reported to the Reserve Bank of India.

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Transaction – V
Export Bill Discounted
 Company B submits the following documents to the bank
o Request letter for Export Bill Discounting
o Bill of Exchange
o Commercial Invoice
o Packing List
o Certificate of analysis from Quality Assurance Department
o Certificate of Origin, in this case it is from Madras Chamber of Commerce
& Industry
o Order sheet
o Bill of Lading
o Insurance Certificate / Policy Original
o Shipping Bill for Export – Exchange Control Copy
 The bill is to be paid in GBP 350,000. The bank will convert GBP into INR at the
then prevailing rate.
 On the due date, the bank will receive funds from the foreign importer.

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Transaction - VI
Realization of Crystallized Bill
 On due date ( 17th February, 2008 ), an export bill has not been paid by the
foreign importer to whom the Indian Exporter ( UBI’s customer ) had supplied the
 UBI-Forex will wait for 30 more days after the due date (i.e. till 18th March,
2008) for crystallization, expecting that the foreign importer will make the
payment. Meanwhile, UBI-Forex will calculate OD charges for these 30 days.
 On the 30th day ( in this case, it is 18th March, 2008), UBI-IFB will crystallize the
bill by debiting the customer – Indian exporter’s Rupee account for the entire bill
amount and the OD charges.
 When the foreign importer makes the payment after crystallizing the bill, it is
called Realization of Crystallized Bill.
 If the payment from UBI-Forex is made in foreign currency, the collection should
also be in foreign currency.
 In case of crystallization, the recovery is made out of exporter’s Rupee account,
and not in foreign currency.
 Hence, export bill will remain outstanding even after crystallization, though it
might have been closed in the books of accounts at the bank.
 When UBI-IFB receives funds in Inward Remittance from foreign importer, it
will relate Realization of crystallized bill with export bill outstanding to close the
outstanding export bill.

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Transaction – VII
Bank Charges
 In case of exports, JKL Ltd – foreign importer will make the payment on the due
date to EFG Ltd – exporter in Chennai for the bill amounting USD 256,184.00
(This amount will be the Inward Remittance).
 At the time of realization, UBI-IFB will credit the entire bill amount
US $ 256,184.00, as they will not know the bank charges that was charged to JKL
Ltd by his bank.
 Three or four days later, the amount for bank charges will be intimated to UBI,
Central Office. The same will be re-directed to UBI-IFB, Chennai to debit those
bank charges, for e.g. US $ 60. These charges will be considered as ‘ Outward
Remittance ’.

Transaction – VIII
Outward Remittance
 Mr. Ram wishes to send US $ 10,000 to his daughter, who is studying in Unites
States of America.
 He will submit his cheque to UBI-Forex valuing in INR.
 UBI-Forex will buy US $ 10,000 from the market at the prevailing exchange rate.
 The same will be sent to USA bank through SWIFT.

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 UBI-Forex has to report all the transactions with respect to Foreign Exchange to
the Reserve Bank of India every fortnight.
 FET-ERS is the software developed by Balance of Payments, Statistical Division,
Department of Statistical Analysis and Computer Services, Reserve Bank of
India, Mumbai.
 This software is being used to make the report to Reserve Bank of India.
 The following are the transactions that are usually to be reported fortnightly.
Imports Exports
Collection Bills Realization Bills
Payment against documents (PAD) Inward Remittances
Bank charges / commission Purchase Bills
Outward Remittances

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Global economic integration has created a market for all kinds of products and services
cutting across national borders. The Indian economy is also clearly on the path of
integration with the global economy facilitated by a number of measures such as
declining tariff barriers, liberalized foreign direct investment regime, capital market
reforms and legal protection for Intellectual Property Rights. India has one of the lowest
labour costs among developing countries, and it also offers a cost-effective
manufacturing base. The Ministry of Commerce & Industry, Government of India has
estimated that off-shoring operations to India can result in a cost benefit of up to 40 – 60
percent for companies from developed countries. The low cost scenario in India has been
utilized by multi-national companies to make India a sourcing and export hub. This is
aptly illustrated by companies in the auto components and industrial goods industries.
The addressable market for global off-shoring exceeds US $ 300 billion. We believe that
India can sustain its global leadership position, grow its offshore IT and Business Process
Off-shoring (BPO) industries at an annual rate greater than 25 per cent, and generate
export revenues of about US $ 60 billion by 2010.

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1 B/L Bill of Lading

2 CS Export Bill Collection at Sight

3 CU Export Bill Collection at Usance

4 DA Basis Deliverable against Acceptance

5 DGFT Director General of Foreign Trade

6 DP Basis Deliverable against Payment
7 DP Note Demand Promissory Note
8 DPG Deferred Payment Guarantees
Refund of excise and custom duty to the exporter by the
9 Duty Draw back
10 ECB External Commercial Borrowings

11 ECGC Export Credit and Guarantee Corporation

12 EEFC Exchange Earner's Foreign Currency

13 EHTP Electronic Hardware Technology Parks
14 EOH Export Order Holder
15 EPCG Export Promotion Capital Goods
16 EPZ Export Processing Zone
17 ESTP Electronic Software Technology Parks
18 ETX Extension of Time Limit

19 FBP Foreign Bills Purchased

20 FCNR(B) Foreign Currency Non-Resident (Banks)

21 FEDAI Foreign Exchange Dealers Association of India

22 FEMA, 1999 Foreign Exchange Management Act

23 FERA Foreign Exchange Regulation Act

24 FET-ERS Foreign Exchange Transaction Electronic Reporting System

25 FTT Foreign Telegraphic Transfer
26 FTZ Free Trade Zone

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27 FUBD Foreign Usance Bill Discounted

28 IBD International Banking Division

29 ICC International Chamber of Commerce
30 ICES / E Indian Customs EDI System - Exports
31 IEC Importer - Exporter Code Number

32 ISB International Service Branch

33 LC Letter of Credit

34 LG Letter of Guarantee

35 LIBOR London Inter-Bank Offer Rate

36 NS Export Bill Negotiation at Sight

37 NTP Normal Transit Period

38 NU Export Bill Negotiation at Usance
39 P0101 Value of export bills negotiation / discount / purchase
40 P0107 Realization of npd export bills
41 P0802 Receipt of consultant / implementation not SOFTEX
42 P1019 Receipts for other services not included
43 PAD Payment Against Document ( Letter of credit )

44 PC Packing Credit

45 PCFC Packing Credit in Foreign Currency

46 PS Export Bill Purchase at Sight

47 PU Export Bill Purchase at Usance

48 RFC A/C Resident Foreign Currency a/c

49 RTGS Real Time Gross Settlement

50 S0102 Payment towards import settlement
51 S0701 Financial intermediation, Bank charges, Commission, etc.
52 S0802 Payment for software consultancy / implementation
53 S1019 Remit towards other services
54 SWIFT Society for Worldwide Inter-bank Financial Transaction

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55 T.T.Rate Telegraphic Transfer Rate
56 UCPDC Uniform Customs & Practices for Documentary Credits
57 WTPCG Whole Turnover Packing Credit Guarantee
58 WTPSG Whole Turnover Post-Shipment Guarantee

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- 86 -
1. Book of Instructions, Union Bank of India,
Manual on Advances.
2. Book of Instructions, Union Bank of India,
Operations, Volume – 1.
3. Book of Instructions on Exports
Volume – 1,
Union Bank of India, International Banking Division
Central Office, Mumbai.
4. Book of Instructions Imports, Remittances, Guarantees
Volume – 2,
Union Bank of India, International Banking Division
Central Office, Mumbai.
5. Book of Instructions on NRI Deposits and Investments
Volume – 3,
Union Bank of India, International Banking Division
Central Office, Mumbai.
6. Business Research Methods
Donald R. Cooper, Pamela S. Schindler
Eighth Edition, Tata McGraw Hill

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