PROJECT REPORT

ON

International Banking

Submitted to University of Mumbai

in

2016-2017

Partial fulfillment of the requirement of the Degree of

Bachelor of Banking and Insurance

Under Guidance Of

K. M. AGRAWAL COLLEGE OF ARTS, COMMERCE & SCIENCE.

GANDHARE, KALYAN (W)

BY-

Priyanka Pagare

ROLL NO: 35

EXAM SEAT NO:

1
K.M.AGRAWAL COLLEGE OF ARTS, COMMERCE& SCIENCE
, KALYAN

(Conducted by HINDI BHASHI JANKALYAN SHIKSHAN SANSTHA

KALYAN)

(Affiliated by University of Mumbai)

Bachlor of Banking and Insurance

CERTIFICATE
This is to certify that Miss. Priyanka Pagare, Roll no.35, Seat No. , has
satisfactorily carried out the project work of the topic “International Banking”
for the 5th semester of T.Y.B.B&I ,in the Academic year 2016-2017

PLACE: KALYAN

DATE : __________ Principal

(Mrs. Anita Manna)

Signature of Examiner B&I Coordinator

2
 CERTIFICATE

I, Miss.Sayli Amrute hereby certify that Ms. Priyanka Pagare, of T.Y.B.B&I

(SemV), Roll No. 35 has completed project on “International Banking” in the

academic year 2016-2017. The information submitted is true and original to the best

of my knowledge.

Place: Kalyan ______________

Date: Signature of Project Coordinater

3
 DECLARATION

I, Priyanka Pagare student of T.Y.B.B&I semester V (2016-2017) hereby declare

that I have completed the project on “International Banking”I further declare that
the information imparted is true and fair to the best of my knowledge.

Signiture:

Priyanka Pagare

ROLL NO. 35

4
 . ACKNOWLEDGEMENT

I hereby express my heartiest thanks to all sources who have contributed to the
making of this project. I oblige thanks to all those who have supported, provided their
valuable guidance and helped for the accomplishment of this project. I also extent my
hearty thanks to my family, friends, our coordinator MR. SUJEET SINGH, college
teachers and all the well-wishers.

I also would specially like to thanks my project guide Miss. Sayli Amryte for his
guidance and timely suggestion and the information provided by him on this
particular topic.

It is matter of outmost pleasure to express my indebt and deep sense of gratitude to

various person who extended their maximum help to supply the necessary information
for the present thesis, which became available on account of the most selfless
cooperation.

Above all its sincere thanks to the UNIVERSITY OF MUMBAI for which this
project is given consideration and was done with outmost seriousness.

5
 INDEX

S.No. CHAPTERS NAME Page No

1 Introduction 7-10

2 Development 11-13

3 Product and Services 14-29

4 International Payment System 30-33

5 Multinationalition of Banking 34-37

6 Recent Trend in International Banking 38-45

7 Case Study 46-56

8 Conculation 57

9 Biblography 58

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 INTRODUCTION TO INTERNATIONAL BANKING

INTRODUCTION

The emphasis is on the theory and practice of international banking, because of its
critical importance in the modern banking framework. International banking is not a
new phenomenon; international bank activity can be traced back to as early as the 13th
century. International banking helps us to know how important international banking
for the progress of India and also for the counter. It is one of the most important
factors responsible for economic growth of the nation. Banks in many nations have
internationalized their operation since 1970. The quantum of operation has increased
in such a manner that the concept evolved into a subject in itself. The term
multinational banking signifies the presence of banking facilities in more than one
country. “Aiber has defined International banking as a subset of commercial banking
transactions and activity having a cross border or cross currency element”. Domestic
operation such as the currency of denomination of the transaction, the residence of the
bank customer and location of the banking office the range of transactions comprised
by International banking can be easily distinguished. A deposit or a loan transacted in
local currency between a bank in its home country and a resident of that same country
is termed as pure domestic banking.

In order to be a success in our export activities, we need to know how to

finance our import or export and how to get paid, especially when dealing in foreign
currencies.  Our banker can and should be a key member of our advisory team. 
Finding a bank that is comfortable and proficient in providing the various products
and services required by exporting and importing firms is becoming easier as
international sales become more and more common.  The expansion of the internet
and the advent of e-banking are also helping to increase the number of banks that
companies can work with for their international banking requirements.

HISTORY OF INTERNATIONAL BANK

7
The origin of international banking dates back to the second century BC when
Babylonian temples safeguarded the idle funds and extended loans to merchants to
finance the movements of goods. The loans extended by the Florentine banking
houses were the first instance of international lending by the of the modern banks to
the forerunners of the modern governments. During the nineteenth century many
innovations were witnessed in the international lending, leading to trade financing and
investment banking. Trade financing started as short term lending. Of the two
investments banking accounted further great bulk of the international lending and
financial companies acted as agents or underwriters for the placement of funds and
thus originated the concept of “Capital Markets”. By 1920, American banking
institutions dominated international lending, and the European nations were the major
borrowers. There was perfect international banking system existing till the time of
First World War. The Britton system had installed a secured financial framework and
revolutionized the economic life by creating a global shopping center. International
banking speeded up after the first oil crisis in 1973. Progress in the
telecommunications sector across the world supplemented the growth of international
banking.

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 INTERNATIONAL BANKING SERVICES WE NEED

International banking services are available to individuals and corporations

that do business internationally. The need for international banking is a requirement
of anyone who has extensive business relationships in foreign countries or is looking
to expand into the foreign marketplace. The essential services that you need when
choosing to establish an international banking relationship are private banking
services, the ability to convert or exchange our currency and paying and receiving
payment for our goods and services. These services are the basic level of services you
require in order to be successful at international banking.

1. Private Banking

Private banking involves the offer of loan rates and other products and
services that are not generally available to retail customers. A private banking
relationship with our international bank gives you access to special offerings and
greater discretion in the way our account transactions are handled or the priority you
account is given.

Advantages

•Private banking gives you exclusive action to special deals and rates.
•You become a prime banking customer with the bank.
Disadvantages

•You may be subject to some additional scrutiny, depending on the country in which
you are doing business.
•Our account may be subject to special taxation or assessment, depending on the
foreign country.
2. Foreign Currency Exchange

We should have a currency exchange service set up in order to take

advantage of changes in currency rates between countries when traveling. The foreign
currency exchange department for an international bank can help determine the best

9
time to exchange our U.S. dollars for local currency as well as trade currency
contracts for you to increase our account’s income.

Advantages

•Helps you take advantage of differences in exchange rates.

•Gives you an opportunity to profit from foreign currency trading.
Disadvantages

•you may have to pay higher service fees on certain currency transactions.
•It is difficult to predict changes in currency rates, which may result in some losses
for you
3. Money Transfer and Collection
As you operate our business with foreign companies, the ability to collect receivables
and pay bills is important. A money transfer and collection facility within an
international bank allows you to transfer and receive payments in an efficient and
timely manner without worrying about time or having to be present to complete
transactions.

Advantages
•You can pay bills and complete payments without the need to be present.
Disadvantages
•You are relying heavily on the abilities of the bank to complete transactions in a
timely manner.
International banking services are available to individuals and corporations
that do business internationally. The need for international banking is a requirement
of anyone who has extensive business relationships in foreign countries or is looking
to expand into the foreign marketplace. An international bank can help you meet our
banking needs when playing on the world stage by providing you with essential
services and assistance.

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 DEVELOPMENT OF INTERNATIONAL BANKING

INTERNATIONAL TRADE IN BANKING SERVICES

International trade theory may be used to address the issue of why banks
engage in the trade of international bank services. Comparative advantage is the basic
principle behind the international trade of goods and services. A country is said to
have comparative advantage in the production of a good (or service) if it is produced
more efficiently in this country than anywhere else in the world. The economic
welfare of a country increases if the country exports the goods in which it has a
comparative advantage and imports goods and services from countries which are
relatively more efficient in their production. At firm level, firms engage in
international trade because of competitive advantage. The exploit arbitrage
opportunities.

A firm will export a good or service from one country and sell it in another
because there is an opportunity to profit from arbitrage. In banking, the traditional
core product is an intermediary service, accepting deposits from some customers and
lending funds to others. The intermediary function involves portfolio diversification
and asset evaluation. A bank which diversifies its assets can offer a risk / return
combination of financial assets to individual investors / depositors at a lower
transactions cost than would be possible if the individual investor were to attempt the
same diversification. Banks also offer the evaluation of credit and other risks for the
uninitiated depositor or investor. The bank acts as a filter to evaluate signals in a
financial environment where the amount of information available is limited. If banks
offer international portfolio diversification and or credit evaluation services on a
global basis, they are engaging in the international trade of their intermediary service.

For example, a bank may possess a competitive advantage in the evaluation

of the riskiness of international assets, and therefore, its optimal portfolio of assets
will include foreign currency denominated assets. A by- product of intermediation is
bank participation in the payments system, including settlement, direct debit, and
chequing facilities. If some of its corporate or retail customers engage in
international trade activity, they will require global money transmission services. The
simplest example is the provision of foreign exchange facilities across national

11
frontiers is now well developed. In parts of Europe, it is possible to use a debit card
from one state (for example, the UK) to obtain local currency in another state (for
example, Spain). To conclude, if a bank offers its intermediary or payments services
across national boundaries, it is engaging in international trade activities and is like
any other global firm which seeks to boost its profitability through international trade.

COST AND BENEFITS OF INTERNATIONAL BANKING

The costs and benefits of the international banking system are reviewed with
the objective of assessing the effect of the international banking development on the
welfare of the national economies. The key benefit from international banking is a
rise in bank consumer surplus, the difference between what a consumer is willing to
pay for a bank service and what the consumer (who in the case of international
banking, is probably a corporate customer) does pay. For bank products, consumer
surplus will increase if deposit rates raise, loans rates fall, and fees for bank service
decline. As the globalization of banking increases, consumer surplus should rise, for
several reasons. First, international banking should increase the efficiency of the
international flow of capital.

For example, the absence of regulation on the Euromarkets has permitted

marginal pricing on loans and deposits – the unconstrained LIBOR rates have
eliminated credit squeezes which tend to arise under an administered rate. New
capital movements will be observed if, prior to the emergence of the system, interest
rates varied across countries. As was observed earlier, there is no doubt the
Euromarkets enhanced the transfer of new capital between countries. MNBs will
increase the number of banks present in the country, thereby increasing competitive
pressure by eroding the traditional oligopolies of the domestic banking system.
Greater competition among the international banks should reduce the price of
international bank products. Domestic banking systems will also be under greater
competitive pressure if some of the country’s consumers are able to purchase
international bank products and by-pass higher prices in the domestic market.

1. Revenue for central government may be reduced. If a central bank imposes

reserve requirements on deposits in the banking system, the introduction of
international banking facilities will lead to the flow of funds out of the
domestic banking system and into the international system where deposit rates
are higher. A reserve ratio requirement is a form of taxation on the banking

12
 system because it requires idle funds to be held at the central bank. The
reduced volume of domestic deposits as they move offshore will reduce
government revenues accruing from this source. These will be reduced still
further if the competition forces the central bank to abandon the reserve ratio
requirement, or eliminate controls on deposit rates.

2 The international banking system is not truly global, because it is largely

confined to the wholesale banking market. This means there is discrimination in loan
and deposit rates, those having access to the offshore banks getting more favorable
terms than their fellow nationals. Since only some of the customers in a national
economy gain, it will not be possible to judge whether there is a net gain accruing to
residents of a give country.

2. The diversion of banking activity from onshore to offshore alters the real resource
costs of banking. Whether they increase or decline is governed by the cost
differential between inshore and offshore banking. The movements of the loan
and deposit rates in the Euromarkets since their operation began suggest the real
resource costs have been lower. But they may have been underestimated for
several reasons. For example, the banks underestimated the cost of lending in the
Eurocurrency markets, especially in the case of sovereign loans; banks thought
this type of lending was almost risk – free, because a country could not be
declared insolvent.

13
 PRODUCTS & SERVICES

The international banking services in India are provided for the benefit of Indian
customers, corporate, NRIs, Overseas Corporate Bodies, Foreign Companies/
Individuals as well as Foreign Banks etc. by UCO Banks International Banking
Branches, Authorized Forex Branches and Integrated Treasury Branch. Other
branches in India also provide international banking facilities through the aforesaid
network of UCO Banks branches. All the facilities are subject to the prevalent
rules & guidelines of the Bank and RBI. Brief details of services provided are as
under:-

1. NRI Banking (Please visit NRI Corner)

2. Foreign Currency Loans

3. Finance/Services to Exporters

4. Finance/Services to Importers

5. Remittances

6. Fore & Treasury Services

7. Resident Foreign Currency (Domestic) Deposits

8. Correspondent Banking Services

9. All General Banking Services

I. NRI BANKING

 DEPOSIT SCHEMES FOR NRI's

 Foreign Currency Non resident (FCNR-B) Deposits:

Customer’s overseas earnings remain fully repatriable in an FCNR (B) Deposit

account with UCO bank.

14
  Reparability

The principal amount and interest earned are fully repatriable.

 Tax Exemption

The Deposit is exempted from Indian Wealth tax. Interest is exempted from Indian
Income tax.

 Choice of Currency

Place our deposit in any of the six international currencies USD, GBP, Euro, JPY,
AUD & CAD. For deposit at any of our authorized branches in India, please remit
money to our Treasury Branch Mumbai accounts with full details.

 Remit in any Currency

Customers can remit in any convertible currency. UCO Bank shall convert it in any of
the above six currencies of our choice.During the customers visit to India the
customer may also tender foreign currency notes/travelers cherubs to UCO banks
branches.

 Minimum & Maximum Amount

There is no upper ceiling; customer can put any amount in these deposits. The
minimum amount for each currency is: USD 2,000 or its equivalent

 Earn Attractive Interest

 Large Number of Branches to choose from

 Choose the Term of Deposit

From a minimum period of 12 months to a maximum period of 60 months,

customer has the choice of keeping the deposit with the bank. Bank also
allows the customer the flexibility of closing the customers Fixed Deposit
account before the due date but the interest rate payable will be subject to a
penalty of 1%. Customers deposit should have run for a minimum period of
one year to be eligible for interest.

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  Automatic Renewal

Customers deposits are automatically renewed on maturity for the same

tenure in case no other instructions are received before due date.

 Joint account

Customer can open a joint account with the bank with other Non-Resident
Indian(s).

 Power of Attorney (P/A)

P/A to Residents permitted for local disbursements only.

 Nomination

Customer can register nomination for this Account.

Loans available against FCNR deposits Banks offer Rupee as well as Foreign
Currency Loans in the currency of Deposit against security of our FCNR Deposits
in UCO banks authorized branches in India. The overseas branches also offer
foreign currency loans against these deposits, subject to rules, if any, applicable
in that country.

 LOANS TO NRIS

Against Deposits

Bank gives loans against NR deposits to NRI deposit account holder and third parties
in Indian Rupees. Bank gives loans against FCNR (B) deposits to NRI deposit
account holder in foreign currency in India. This facility is available at our overseas
branches, subject to local directives, if any in that country.

NRI Home Loans

16
Bank has attractive schemes to accommodate the housing needs of NRIs.

i. Loans for Residential Property NRIs can avail of loans for

 Construction of a new residential house
 Purchase of a residential flat or residential house
 Extension of a residential flat or residential house
   
ii. Renovation of a residential flat or residential house
iii. Loan for Plot of Land for residential use

NRIs can avail of loans for purchase of a residential plot of land for residential
use.

iv. Loans against existing residential property

NRIs can avail of loans by mortgaging an existing residential property for any of the
following purposes. The loan shall be utilized for meeting the borrower's personal
requirements or for his own business purposes :- Education , Business ,Medical
treatment.

Prohibition:

The proceeds of rupee loan should not be utilized for any of the following activities:

 The business of chit fund, or

 Agricultural or plantation activities or in real estate business, or construction of
farm houses, or
 Trading in Transferable Development Rights (TDRs), or
 Investment in capital market including margin trading and derivatives.

II. FOREIGN CURRENCY LOANS

17
 a) In India (FCNR 'B' Loans): The foreign currency denominated loans in
India are granted out of the pool of foreign currency funds of the Bank in FCNR
Deposit etc. accounts as permitted by Reserve Bank of India. These loans are
commonly known as FCNR Loans.

UCO has a broad base of NRI customers/depositors. Therefore, with the resource base
of FCNR deposits etc. UCO is in a position to offer the Foreign Currency Loans in
India to our customers as an alternative to loans in Rupees.

These loans are denominated in foreign currency such as US Dollars and are offered
as short term loans. The interest is fixed with a reasonable spread over LIBOR

UCO also allows loans in foreign currency to NRIs against their FCNR Deposits
at the Indian Branches. The details are available in NRI banking section.

b) From Outside India: With presence at two major financial centers of the
world, UCO has foreign currency resources to arrange /grant Foreign Currency Loans
to Indian as well as multinational corporate at the competitive rates. The foreign
currencies denominated loans are granted by our overseas branches to Indian
Corporate as per External Commercial Borrowing (ECB) Policy of Govt. of
India/RBI.

III. FINANCE SERVICES TO EXPORTERS

UCO GOLD CARD FOR EXPORTERS: -

UCO launches Gold card for creditworthy exporters - Simplified access to

export credit on very good terms Better terms of credit including rates of interest than
those extended to other exporters by the Bank. Processing of applications for credit
faster than for other exporters. Simpler norms, subject to specific requirements in each
case, if any. 'In-principle' limits for a period of 3 years with a provision for automatic
renewal, subject to fulfillment of the terms and conditions of sanction. Preference for
grant of packing credit in foreign currency (PCFC), subject to availability of foreign
currency funds. Lower charges schedule and fee-structure than those provided to other
exporters. Relaxations in the norms in respect of security and collaterals, wherever

18
feasible. Other facility/benefit to the exporters, subject to the fulfillment of extant
rules and regulations applicable to export finance.

TYPES of FACILITIES FOR EXPORTS

a) Rupee Export Credit (pre-shipment and post- shipment):

UCO provides both pre and post shipment credit to the Indian exporters through
Rupee Denominated Loans as well as foreign currency loans in India. Credit facilities
are sanctioned to exporters who satisfy credit exposure norms of UCO. Exporters
having firm export orders or confirmed L/C from a bank are eligible to avail the
export credit facilities. Rupee export credit is available for a maximum period of 180
days from the date of first disbursement. In deserving cases extension may be
permitted within the guidelines of RBI. The corporate may also book forward
contracts with UCO in respect of future export credit drawls, if required, as per the
guidelines/directives provided by RBI.

b) Pre-shipment Credit in Foreign Currency (PCFC):

UCO offers PCFC in the foreign currency to the exporters enabling them to fund their
procurement, manufacturing/processing and packing requirements. These loans are
available at very competitive international interest rates covering the cost of both
domestic as well as import content of the exports. The corporate /exporters with a
good track record can avail a running account facility with UCO for PCFC. PCFC in
foreign currency is available for a maximum period of 180 days from the date of first
disbursement similar to the case of Rupee facility.

Features:

In the PCFC drawls permitted in a foreign currency other than the currency of
export, exporter bears the risk in currency fluctuations. The foreign currency drawls
are restricted to major currencies at present. In case, the export order is in a non-

19
designated currency, PCFC is given in US$. For orders in Euro, Pound Sterling and
JPY, PCFC can be availed in the respective currencies or US$ at the choice of
exporter. Multi -currency drawls against the same order, are not permitted at present
due to operational inconvenience.

Repayment:

PCFC is to be repaid with the proceeds of the export bill submitted after
shipment. In case of cancellation of export order, the PCFC can be closed by selling
equivalent amount of foreign exchange at TT selling rate prevalent on the date of
liquidation.

c) Negotiation of Bills under L/C:

UCO's International Banking Branches and Authorized Forex Branches are

active in negotiation/discounting of sight /Usance
international export bills under L/Cs opened by foreign banks as well as branches of
Indian banks abroad. UCO offers the most competitive rates. These transactions are
undertaken by our branches within the Bank/Country Exposure ceilings prescribed by
UCO.

d) Export Bill Rediscounting:

UCO provides financing of export by way of discounting of export bills, as

post shipment finance to the exporters at competitive international rate of interest.
This facility is available in four currencies i.e. US$, Pound Sterling, Euro and JPY.
The export bills (both Sight and Usance) drawn in compliance of FEMA can be
purchased/ discounted. Exporters can avail this facility from UCO to cover the bills
drawn under L/C as well as other export bills.

e) Bank Guarantees:

20
 UCO, on behalf of exporter constituents, issues guarantees in favor of
beneficiaries abroad. The guarantees may be Performance and Financial. For Indian
exporters, guarantees are issued in compliance to RBI guidelines.

VI. FINANCE/SERVICES TO IMPORTERS

a) Collection of Import Bills:

UCO has correspondent relationship with reputed International Banks

throughout the world and can thus provide valuable services to importers who may be
importing from any part of the Globe. The import bills are collected by our
International Banking Branches and Authorized Forex Branches at very competitive
rates. The import bills drawn on customers of other branches are also collected
through these branches.

b) Letter of Credit:

On account of UCO's presence in international market for decades, UCO has

established itself as a well known international bank. L/Cs of UCO is well accepted in
the International market. For any special requirement UCO can get the L/C confirmed
by the top international banks. Thus UCO's L/C facility for the purchase of
goods/services etc. fulfills the requirements of all importers to arrange a reliable
supply. UCO offers this facility to importers in India within the ambit of FEMA and
Exam policy of Govt. of India. UCO uses state of the art SWIFT network to transmit
L/Cs and with a worldwide network of correspondents and our overseas branches
facilitates prompt & efficient services to the importers.

c) Financing of import:

21
 I. Usance L/C facility UCO's Usance L/C facility provides the importer an
opportunity to avail credit from their supplier/supplier's bank.
II. Deferred Payment Guarantee/Standby LC

UCO's Deferred Payment Guarantee/Standby LC facility also provides the

importer an opportunity to avail credit from their supplier/supplier's bank.

III. Foreign Currency Loans

Short term External Commercial Borrowings or Trade Credits for less than three
years as permitted by RBI for imports into India is allowed by our overseas
branches to Indian importers at very competitive rates. These are generally backed
by L/Cs opened by importer's bank. Indian importers can also avail this facility
from our overseas branches as roll-over credit on their bank agreeing to extend the
L/C in favor of our overseas branches.

d) Bank Guarantees:

UCO, on behalf of importer constituents or other customers, issues guarantees in

favor of beneficiaries abroad. The guarantees may be both Performance and Financial.

V. REMITTANCES

Remit through us EITHER to our own account with us or any other bank OR to our
near and dear ones. We offer an efficient, easy and convenient channel to transfer
money back home in any corner in India.

Through our Overseas Branches

Just walk in to any of our branches in Singapore and Hong- Kong or call them for
assistance.

22
Through our Accounts with Correspondents

The most convenient way of remitting the money from any part of the world is a
direct credit into UCOBANK Treasury Branch Mumbai Account with correspondents.

We have correspondent arrangements worldwide. The details of our accounts in six

major currencies are placed on the web for our convenience. Just send full remittance

instructions to our bank for a direct credit into our Treasury Branch Mumbai Account
with correspondents.

Through Drafts/Cheques

Send our Bank Drafts or Cheques to any of our branches in India with full particulars
of remittance/beneficiary. If you are remitting from Singapore or Hong Kong, avail
the facility of remittance provided by our overseas branches. UCO, through its
worldwide network of correspondents, Indian branches and overseas branches, offers
prompt inward and outward foreign remittance facilities at very competitive rates. The
use of SWIFT network adds to reliability and efficient handling. The remittances are
handled by our International Banking Branches and Authorized Forex Branches. The
outward remittances of customers of other branches are also remitted through these
branches. Through our well-spread network of branches in India, inward remittances
reach every nook & corner in India. UCO has tie-up arrangements with Western
Union Money Transfer.

VI. FOREX & TREASURY SERVICES

UCO operates in the Forex Market in India as well as abroad. In India the inter-bank
fore operations is centralized at our Integrated Treasury Branch in Mumbai, country's
undisputed financial hub. UCO's International Banking Branches and Authorized
Forex Branches undertake customer transactions. The fore requirements of customers
of other branches are also routed through these branches. Overseas branches

23
undertake the fore treasury operations in Singapore and Hong Kong centre. UCO
deals in all the important international currencies. Our Forex Treasuries generally
undertake the following treasury related activities:-

Forex Inter Bank Placements/Borrowings

Sale & Purchase of currency on behalf of customers

Forward Cover Bookings

Cross Currency Swaps

Interest Rate Swaps (IRS)

a) FOREX SERVICES FOR CORPORATES

b)

To improve the standard of service to the valued clientele, UCO has integrated its
Forex and Domestic Treasury Operations under one roof in Mumbai. UCO's Forex
Inter-bank desk at Treasury Branch is an active market player. UCO's integrated
operation at one place in Mumbai enables it to participate in inter-bank transactions
on a large scale. Forex Dealing Rooms in Singapore and Hong Kong and a worldwide
network of correspondents add to UCO's strength in providing the best fore corporate
services. International Banking Branches and Authorized Forex Branches spread
across the country cater to needs of all customers in foreign exchange. Corporate
Forex Services include Foreign Currency Sale & Purchase, Forward Booking, and
Cross Currency Forward etc. Other products like Collection & Negotiation of Export
& Import Bills under LC, LC Issuance, Advising & Confirmation Services,
Arrangement of Trader Credits, the guarantees on behalf of Indian Corporate/Projects,
EEFC Accounts, and Remittance etc. are all available to corporate customers from

24
UCO. UCO is establishing a Derivative Desk in India to offer various Derivative
Products, such as IRS, FRA, Cross-currency Options, and Currency Swaps with
Cross-currency Interest Rate Swap etc. With this UCO will also offer structured
products suitable for Corporate who have large receivables or payment obligation in
foreign currencies. Derivative Desk will deal in hedging products to hedge the market
risks i.e. interest rate risk and foreign exchange risk in Bank's balance sheet.

VII. RESIDENT FOREIGN CURRENCY (RFC) DEPOSITS:

Returning Indians for permanent settlement, after staying abroad for not less than one
year, can

∙ Retain their savings in foreign currency in a RFC account with UCO

∙ Get the proceeds of FCNR (B)/NRE Deposits credited to this account  
∙ Reparability

Permitted for bonafide purposes for self & dependents including exchange required
for travel, other personal purposes and investments.

∙ Conversion into FCNR (B)/NRE

On becoming an NRI again, customers can transfer these funds into an FCNR (B) or
NRE account.

∙ Choice of Currency

Place the deposit in any of the six international currencies USD, GBP, Euro, JPY,
CAD and AUD.

∙ Remit in any Currency

Customers can remit in any convertible currency. Bank shall convert it in any of the
above six currencies of our choice.

25
∙ Earn Attractive Interest

 NON RESIDENT EXTERNAL (NRE) DEPOSITS   :

NRE deposits can be placed with us in following a/cuss

Savings Bank A/c – at present interest rate is 3.5%.

Fixed Deposit A/c – at following interest rates

For creation of NRE deposits, remittances from abroad should be made to us in

convertible rupees or in any hard currencies like USD, GBP, EUR and JPY etc.
Above deposits are repatriable in any currency.

 NON RESIDENT ORDINAR (NRO) DEPOSITS:

Where an Indian citizen having a resident account leaves India and becomes non-
resident, his resident account should be designated as NRO account.

Where non-resident Indian receives income in India, he can open a NRO a/c with
such funds.

NRO a/c may also be opened by foreign exchange remitted through normal banking
channels.

All types of a/c like SB, CD and all term deposits as applicable to domestic deposits
can be opened Interest rates are as per domestic deposits. Interest is taxable.

RUPEE DEPOSITS - HIGHLIGHTS

26
  Type of Accounts

You can open Savings Bank, Current, Recurring and Fixed Deposit accounts with us.

 Authorized Branches

For our Indian branches accepting Indian Rupee NRE Deposits, please get in touch
with NRI Relationship Centre at our Head Office or the respective Regional Offices
of our choice.

 Interest Rate

We offer attractive rate of interest on our deposits.

 Remit in any Currency

For NRE accounts we can remit in any convertible currency. We shall convert it in
Indian Rupees.

 Joint Accounts, Power of Attorney, Nomination

NRE Accounts – Same as in case of FCNR (B).

NRO Accounts – Joint accounts with residents permitted, Nomination facility

available.

RESIDENT FOREIGN CURRENCY (DOMESTIC) A/Cs

UCO also offers Resident individuals in India, the facility to open non-interest
bearing current account in foreign currency at the selected Indian branches as
permitted by RBI. A joint account with a resident eligible to open RFC (D) account is
permissible. Nomination facility is also permitted. Thus UCO will provide an option
to resident individuals to retain their receipts from abroad in foreign currency as
permitted by RBI.

VIII. CORRESPONDENT BANKING SERVICES

27
The extensive network of branches in India and presence in two important
international centers enables UCO to offer correspondent banking services to the
banks. The International Banking Branches and Authorized Forex Branches in India

as well as our overseas branches are capable of providing the services that an
international correspondent Bank can offer.

UCO can provide the following main services:-

I) Collection of bills both Documentary and Clean.

ii) Advising/confirming of L/Cs opened by banks

iii) Discounting of Bills drawn under L/Cs

iv) Maintenance of foreign currency accounts in S$ and HK$

v) Maintenance of Rupee accounts in India

vi) Making foreign currency payments/remittance on behalf of customers of banks.

UCO's excellent service with competitive charges provides a good Correspondent

Banking solution. Co’s overseas branches are active in discounting of usance
international trade bills. With foreign currency resources of overseas branches, UCO
offers the most competitive rates for discounting of these bills. The bills under the
L/Cs of the most of the Indian Banks as well as International Banks are also
discounted at competitive rate.

IX. EXTERNAL COMMERCIAL BORROWING (ECB)

The foreign currency loans to the Indian corporate are granted by UCO's overseas
branches. The borrowings raised by the Indian corporate from specified banking
sources outside India are termed "External Commercial Borrowings" (ECBs). These

28
ECBs can be raised within the Policy guidelines of Govt. of India/Reserve Bank of
India, as applicable from time to time. ECB includes the following:-

I) Commercial Loans

ii) Syndicated Loans

iii) Floating/Fixed rate notes and bonds

iv) Lines of Credit from foreign banks and financial institutions.

v) Import loans, loans from the export credit agencies of other countries.

UCO can offer following services to the Indian corporate in respect of cross border
financing:-

I) Arranging/granting External Commercial Borrowings by way of Foreign Currency

Loans, FRNs, and Bonds for the Indian corporate.

ii) Arranging/underwriting International Syndicated Loans for the Indian corporate.

iii) Participating in the International Loan Syndications.

iv) Granting loans backed by Export Credit Agencies.

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 INTERNATIONAL PAYMENT SYSTEM

A payments system is the system of instruments and rules which permits agents to
meet payment obligations and to receive payments owed to them. As was noted in
Chapter 1, banks, as intermediaries, are important players in the payments system
because they are the source of the legal currency and they facilitate the transfer of
funds between agents. Denial of access to payments can be used as an entry barriers
in banking. If the payments system extends across national boundaries, it becomes a
global concern. Typically, major banks acts as clearing agents not only for individual
customers but also for smaller banks. There is a high degree of automation in the
international banking system.

As “DELIVERY” is the essence of the contract for the importer, timely and sure
receipt of payment is the matter that is of prime interest to exporter. International
transactions have to effect payment from one party to the other party. There are
various ways to effect these payments. Payments may be gifts or remittances; the key
systems are outlined below:

1. CLEAN PAYAMENTS :-

There is a direct form of settlement between the exporter and bank. The merchandise
is shipped by the exporter and the shipping documents and invoice are directly
forwarded to the overseas buyer. The buyer then remits the payment . this mode of
transacting carries an element of risk for the exporter, if the foreign buyer defaults to
make payment. If the payment remitted in advance, there is an element of risk for the
buyer. hence these form of settlement can be used only for small value of transaction.

2. DOCUMENTARY BILL :-

Under this system the goods are consigned by ship; the shipping documents and
commercial invoice are attached to the demand draft and send to the overseas banker
of the buyer for collection. The documents are delivering to the buyer against
payment at the overseas centre. These are called D\P Bills. When a L\C can not be
established this is the ideal mode of payment. the exporter can also attach the after

30
 sight bill for a specified no. of days and advise the banker to deliver the bill of lading
and other documents against acceptance of the after sight draft. The banker will
deliver the documents and on the due date of the draft he will collect the amount and
remit to the exporter. This called D\A Bill.

3. BANKERS’ DOCUMENTARY LETTER OF CREDIT(documentary credit)

Letter of credit established by the banker of the overseas buyer, in favor of exporter.
The letter of credit is advised and generally confirmed by the local bank in the
country of exporter. Normally the l\c is made available by the overseas buyer while
sending is order initially or within a short time thereafter, and base on the letter of
credit, the exporter’s bank may allow packing credit to the exporter to procure and
export the goods. The l\c safeguards the interest of both and offer the best mode of
transacting.

4. CONSIGNMENT TERM:-

Under the consignment term the goods are not sold to the buyer but sent to the agent
of the exporter in foreign country. The exporter continues to own the goods even if
the agent in the overseas country remits an advance payment. The consignment agent
arranges to sell the goods at the foreign country on behalf of the exporter.

 RTGS (REAL TIME GROSS SETTLEMENT) PAYMENT SESTEMS

Settlement in “Real time” means payment transaction is not subjected to any waiting
period. The transaction is settled as soon as processed. “Gross settlement” means the
transaction is settled on the one to one basis without vouching with any other
transaction.

31
World over the central banks manages RTGS system because the all banks in a
country maintain a current account with central bank. Accordingly, in India it is being
managed by RBI.

Society for Worldwide Interbank Financial Telecommunications :-

SWIFT, the Society for Worldwide Interbank Financial

Telecommunications, which was established in Belgium in 1973.
A cooperative company, it is owned by roughly 2000 financial institutions, including
banks, worldwide. The objective of SWIFT is to meet the data communications and
processing needs of the global financial community. It transmits financial messages,
payment orders, foreign exchange confirmations, and securities deliveries to over
3500 financial institutions on the network, which are located in 88 countries. The
network is available 24 hours a day, seven days a week throughout the year. The
messages include a wide range of banking and securities transactions, including
payment orders, foreign exchange transactions, and securities deliveries. In 1992, the
system handled about 1.6 million messages per business day. Real time and on-line,
SWIFT messages pass through the system instantaneously.

FEDWIRE & Clearing House Interbank Payments System

FEDWIRE and CHIPS: both of these systems are for high value, dollar
payments. FEDWIRE, the Federal Reserve’s Fund Transfer System, is a real –
time gross settlement transfer system for domestic funds, operated by the Federal
Reserve. Deposit – taking institutions that keep reserves or a clearing account at the
Federal Reserve use FEDWIRE to send or receive payments, which amounts to about
11000 users. In 1992, there were 68 million FEDWIRE funds transfers, with a value
of $199 trillion. The average size of a transaction is $3 million. CHIPS, the
Clearing House Interbank Payments System, is a New York – based private
payments system, operated by the New York Clearing House Association since
1971. CHIPS are an online electronic payments system for the transmission and
processing of international dollars. Unlike FEDWIRE, there is multilateral netting of

32
payments transactions, and net obligations are settled at the end of each day. At 1630
hours (Eastern Time), CHIPS informs each participant of their net position. Those in
net deficit must settle by 1745 hours, so all net obligations are cleared by 1800. Most
of the payments transferred over CHIPS are international interbank transactions,
including dollar payments from foreign exchange transactions, and Eurodollar
placements and returns. It also makes payments associated with commercial
transactions, bank loans, and securities. Obligations on other payments or clearing
systems can be settled through CHIPS. In 1992, there were 40 million payments,
valued at $240 trillion.

Clearing House Automated Payments System:-

CHAPS : London – based, the Clearing House Automated Payments

System was established in 1984 and permits same – day sterling transfers. There are
14 CHAPS settlement banks, including the Bank of England, along with 400 other
financial firms which, as sub-members, can engage in direct CHAP settlements.
The 14 banks are responsible for the activities of sub-members, and settle on
their behalf at the end of each day. The closing time in 1510 hours (GMT). The Bank
of England conducts a daily check of the transfer figures submitted to them. In 1992,
the total value of payments through CHAPS was $20 928 billion, equivalent to a
turnover of British GDP every seven days. There are other payments systems in the
UK; CHAPS is for high-value, same-day sterling transfers. CHAPS accounts for just
over half the transfers in the UK payments system; the average daily values
transferred through the UK system were $161 billion in 1993. A framework for
introducing real time gross settlement was drawn up in 1993. It will mean
transactions across settlement accounts at the Bank of England will be settled in “real
– time”, rather than at the end of each day. A number of the large global banks run
their own electronic payments systems, primarily to facilitate internal global
payments. These systems are run alongside SWIFT and other public systems. The
internal systems are also used to attract corporate business.

33
 MULTINATIONALIZATION OF BANKS

To complete the theoretical picture of global banking, the second question should be
addressed – that is, why do banks set up branches or subsidiaries and therefore
become multinational banks? The question is best answered by drawing on the theory
of the determinants of the multinational enterprise. A multinational enterprise (MNE)
is normally defined as any firm with plants extending across national boundaries.
Modifying this definition for banking, a bank with cross – border branches or
subsidiaries is a multinational bank. It is important to stress from the outset that
location efficiency conditions in a given country are necessary, but not sufficient to
explain the existence of MNEs.

Location efficiency refers to the choice of a plant location – comparatively, there is an

advantage in being the lowest cost producer of a good or service. However, to
explain the existence of the MNE, other factors are at work – otherwise, one would
observe a domestically domiciled firm producing and exporting the good or service.
Thus, one has to look beyond location efficiency to explain why a plant is owned by
non-resident shareholders. There are two important reasons why an MNE rather than
a domestic form produces and exports a good or service. Barriers to free trade, due to
government policy or monopoly power in supply markets, are the first explanation for
the existence of MNEs. For example, Japanese manufacturers have set up European
subsidiaries, hoping to escape some of the harsh European trade barriers on the import
of Japanese manufactured goods. The second is imperfections in the market place,
often in the form of a knowledge advantage possessed by a certain type of firm which
cannot be easily traded. American fast food conglomerates have been very successful
in global expansion through franchises, which profit from managerial and food know-
how originally developed in the USA. The same framework can be applied to
explain the presence of multinational banks (MNBs). Banks may opt to set up
branches or subsidiaries overseas because of barriers to free trade and / or market
imperfections.

For example, US regulations in the 1960s effectively stopped foreigners from issuing
bonds in the USA and American companies from using dollars to finance foreign

34
direct investment. US banks got round these restrictions by using their overseas
branches, especially in London, because it was a key centre for global finance. Later,
these banks used their London subsidiaries to offer clients investment banking
services, prohibited under US law. Additionally, the nature of banking means banks
possess a number of intangible assts which cannot be traded in the market place.

For example, a bank may wish to profit from the employment of superior
management skills in a foreign country, provided location efficiency conditions are
met. Thus, US banks with management expertise in securitization may transfer these
experts to their London subsidiaries, as the securitization may transfer these experts to
their London subsidiaries, as the securitization business in Europe grows. Japanese
banks have established subsidiaries in London and New York, where the markets are
subject to fewer regulations than in Japan. This move was partly motivated by a
belief that experience gained in other markets would give bankers a competitive edge
in the event that Japanese financial markets are deregulated. Reputation is an
important intangible asset possessed by banks. Many of the London merchant banks
have established offices in other countries, to exploit their reputation for expertise in
corporate finance, and other investment banking services. It is not possible to sell
reputation on an open market. Provided location efficiency conditions are met,
reputation may be a profitable reason for a bank expanding across national borders.
Many authors (for example, Callback, 1984) have argued that MNBs exist because
banks need to follow their corporate customers overseas. The theory outlined above
is not inconsistent with this traditional explanation. Suppose the customer of a bank
decides to set up a subsidiary in a foreign country.

Additionally, the bank may follow the corporate customer overseas to protect its own
assets. If the bank is going to lend funds to a multinational firm, it will require
information on the foreign operations to properly assess the creditworthiness of the
client. The optimal way of gathering information may be the establishment of a
branch or subsidiary in the foreign country. Effectively, the bank internalizes the
implicit market for this information. To summaries, the term international banking
should be defined to include two different activities: trade in international banking
services, consistent with the traditional theory of competitive advantage for why

35
firm’s trade, and MNBs, consistent with the economic determinants of the
multinational enterprise.

MULTINATIONAL BANKING

Historical Background

Multinational banks (MNBs) are banks with subsidiaries, branches, or

representative offices which spread across national boundaries. They are in no way
unique to the post – war period. For example, from the 13the to 16 th centuries, the
merchant banks of the Medici and the Fugger families had branches located
throughout Europe, to finance foreign trade. In the 19th centuries, MNBs were
associated with the colonial powers, including Britain and, later on, Belgium,
Germany and Japan. The well – known colonial MNBs include the Hong Kong and
Shanghai Banking Corporation (HSBC), founded in 1865 by business interests in
Hong Kong specializing in the “China trade” of tea, opium and silk. Silver was the
medium of exchange. By the 1870s, branches of the bank had been established
throughout the Pacific basin. In 1992, the colonial tables were turned when HSBC
acquired one of Britain’s major clearing banks, the Midland Bank. The National
Bank of India was founded in 1863, to finance India’s export and import trade.
Branches could be found in a number of countries trading with India. The Standard
Bank was established in 1853 specializing in the South African wool trade.
Headquartered in London, it soon expanded its activities to new developments in
South Africa and Africa in general. Presently it is known as the Standard Chartered
Bank, and though it has a London head office, the bank does virtually no domestic
business in the UK. By 1914, the Deutsche Bank had outlets around the world, and
German banks had 53 branches in Latin America. The Societe General de Belgium
had branches in the Belgian African colonies, and the Mitsui Bank established
branches in Japanese colonies such as Korea. All of these banks were “colonial”
commercial banks because their primary function was to finance trade between the
colonies and the mother country. Branches were normally subject to tight control by
head office. Their establishment is consistent with the economic determinants of the
MNE, discussed earlier. Branches meant banks could be better informed about their

36
borrowers engaged in colonial trade. Since most colonies lacked a banking system,
the home country banks’ foreign branches met the demand for banking services
among their colonial customers. A number of multinational merchant (or investment)
banks were established in the 19th century – good examples are Barings (1762) and
Rothschild’s (1804). They specialized in raising funds for specific project finance.
Rather than making loans, project finance was arranged and stock was sold to
individual investors. The head office or branch in London used the sterling interbank
and capital markets to fund the project finance these banks were engaged in. Capital
importing countries included Turkey, Egypt, Italy, Spain, Sweden, Russia, and the
Latin American countries. Development offices associated with the bank were
located in the foreign country. Multinational merchant banks are also consistent with
the economic determinants of the MNE. Their expertise lay in the finance of
investment projects in capital poor countries; this expertise was acquired through
knowledge of the potential of the capital importing country (hence the location of the
development offices) and by being close to the source of supply, the London financial
markets. There was rapid expansion of American banks overseas after the First World
War.

In 1916 banks headquartered in the USA had 26 foreign branches and offices,
rising to 121 by 1920, 81 of which belonged to five US banking corporations. These
banks were established for the same purpose as the 19th century commercial banks, to
finance the US international trade and foreign direct investment of US corporations,
especially in Latin America. In the 1920s, these banks expanded to Europe, in
particular Germany and Austria. By 1931, 40% of all US short – term claims on
foreigners were German. A few American and British banks established branches
early in the 20th century, but the rapid growth of MNBs took place from the mid –
1960s onward. Davis (1983) argued that in this period banks moved from a “passive”
international role, where they operated foreign departments, to one where they
became “truly international” by assuming overseas risks As expected, the key OECD
countries, including the USA, UK, Japan, France, and Germany, have a major
presence in international banking.

37
 RECENT TREND IN INTERNATIONAL BANKING

RECENT DEVELOPMENT IN GLOBAL BANKING

Banking crises in emerging markets in the 1990s were associated with major
macroeconomic disruptions: sharp increases in interest rates, large currency
depreciations, output collapses and lasting declines in the supply of credit. Bank credit
has since recovered in a number of countries, and there have been significant changes
in banking structure, performance and risk management capacity. Drawing on
contributions by senior central bank officials from emerging market economies and
staff of the Bank for International Settlements, the volume seeks to shed light on
recent developments by addressing five broad topics.

1. Recent trends in bank credit

After peaking in the second half of the 1990s, bank credit to the private sector has
recently risen in a number of emerging market economies, partly because of stronger
demand for loans associated with robust growth and low interest rates, and partly
because of greater supply of loans associated with improved bank balance sheets. The
share of bank credit to the business sector has nonetheless declined in part because
lagging investment spending has curbed corporate loan demand, and also because of
the availability of financing in bond and equity markets. In some countries risk averse
banks have held government securities rather than lend to the corporate private sector.
Financial institutions have increased lending to households but this exposes them to
new forms of risk, as illustrated by difficulties in the credit sector in Korea earlier in
this decade. One concern is that banks in some countries have transferred a significant
amount of interest rate or exchange rate risk to households through floating rate credit
or loans denominated in foreign currency.

38
2. The pace of structural change

Banking systems in emerging economies have been transformed by privatization,

consolidation and foreign bank entry. Bank efficiency and performance have
improved, apparently in response to a more competitive climate. More recently,
reforms appear to have slowed, in part because the easy work had been done and
because of alternative approaches to reform. For example, rather than engaging in full
scale privatization, countries like China and India are only gradually transferring
ownership of major state-owned banks to the private sector. As for bank
consolidation, it has been market-driven and foreign banks have played an important
role in central and eastern Europe and Mexico, while the state has played a larger role
in Asia. Increased concentration was not seen as a threat to competition and access to
bank financing had improved with the growing presence of foreign banks. However
foreign banks raised political concerns because of perceived high profits and were
also difficult to supervise because parent banks' global goals and information flows
did not always coincide with the needs of host country supervisors.

3. Evolution in and management of risks facing banks

Macroeconomic vulnerabilities (particularly to external shocks) appear to have

declined, reflecting a mix of favorable temporary conditions as well as improved
policies (higher foreign reserves, more flexible exchange rates, domestic debt market
development and improved fiscal policies). However, some central banks were still
concerned about vulnerability to certain shocks (eg. to domestic demand, to increases
in oil prices or interest rates or declines in property prices), particularly given the
exposure of banks to interest rate or exchange rate risk and the need in some countries
for further fiscal consolidation. Banks increasingly relied on systematic risk
assessment procedures and quantitative risk management techniques, with lending
being influenced less by government direction or special bank relationships with
borrowers. However, challenges still arose from lack of data on loan histories for
estimating default probabilities, and risks related to liquidity and credit risk transfer.

39
4. Preventing systemic banking crises

One indicator of stronger banking systems is that the volatility of output and inflation
has fallen in emerging market economies while their capital ratios have risen
significantly. This reflects (i) policies designed to improve bank governance and
information disclosure that enhances market discipline, (ii) regulatory measures to
dilute risk concentration, limit connected lending, establish realistic provisioning rules
and to improve inspection process; (iii) the evolution in supervisory strategy from
"ratio watching" (checking bank positions against predetermined prudential ratios) to
examining the bank's risk management process. The ability to take early action to deal
with incipient problems before a crisis develops has also been enhanced by increased
authority, independence and legal protection for supervisors. At the same time,
explicit and limited deposit insurance has helped make clear that not all bank deposits
are guaranteed by the government. The payment of fixed premia have encouraged
banks to monitor the strictness/effectiveness of supervisory authority and ensured
weak banks share the burden of any payouts. Some of these improvements have been
helped by efforts to adopt international standards for best practice (Basel Core
Principles for Effective Banking Supervision, Basel I and Basel II) and outside
assessments of financial stability (i.e. Financial Sector Assessment Programs, or
FSAPs). Challenges remain, including changing the culture in supervisory agencies as
well as audit departments of banks towards more effective risk management, and the
lack of adequately trained staff.

5. Changing financial intermediation: implications for monetary policy

Bank deregulation and global integration has on the one hand made monetary policy
in emerging markets more potent by allowing a wider range of transmission channels,
including asset market and exchange rate channels. Domestic bank loan rates also
appear to be more responsive to changes in money market rates in countries with
profit-driven banking systems, perhaps reflecting the recovery in the health in banking
systems (pass through is lower in countries with weak bank systems eg. post 1997-
1998 crisis). On the other hand, external factors unrelated to monetary policy have

40
also shaped bank behavior. For example, demand for bank deposits has depended on
exchange rate expectations. Global integration had also led to some convergence in
long-term interest rates.

“Indian banking – global benchmarks”. Today it is “Global banking – paradigm

shift”. This subtle change of emphasis in themes – from Indian banking to global
banking – clearly reflects today’s reality: the increasing globalization of the
Indian economy.

Over the past decade, India has emerged as one of the fastest-growing economies on
the globe. The rest of the world has been impressed to see that the reforms initiated in
the early 1990s are bearing fruit. To sustain any country’s growth, of course, a strong
and dynamic financial sector is essential.

The BIS and its various committees of experts play a major role in shaping the
policies, standards and so on that help to ensure global financial stability. There are a
few of the important committees and groups. One is the Committee on the Global
Financial System (CGFS). This Committee regularly monitors the latest developments
in financial markets worldwide, and also investigates how structural changes affect
the working of the global financial system. Representatives of the Reserve Bank of
India are active participants in the work of the CGFS. Another key committee is the
Basel Committee on Banking Supervision, with which many of you will be familiar.
The Basel Committee formulates broad supervisory standards and recommends
guidelines for sound practices in the areas of banking system supervision and
regulation. The Basel Committee does not enforce compliance with the standards it
issues. Rather, the expectation is that national authorities will take steps to put in
place the necessary arrangements, statutory or otherwise, that are best suited to their
own national systems. The BIS Financial Stability Institute (FSI) helps financial
sector supervisors to implement these standards and so strengthen their financial
systems. A large number of conferences, high-level meetings and seminars are held
by the FSI in Basel as well as in different regions around the world. The FSI also
offers an online learning tool – FSI Connect – that is helping to train banking
supervisors in some 95 jurisdictions around the world. The FSI and the BIS generally
have deepened their contacts with the financial industry in recent years. The Basel II
process provides one recent obvious instance. This revision of banks’ capital
adequacy requirements was undertaken over a period in which consultation with the

41
private sector – throughout the world, not just in the main financial centers – was
intense and continuous. The three themes related to the interface between the
financial markets and various elements of the regulatory framework that I believe are
relevant to global banking today.

The first theme is: market forces and the rationale of Basel II . Because global
market forces are increasingly shaping the structures of national banking systems,
supervision needs to be conducted in ways that harness market discipline.

The second is: the importance of market contestability . Technological developments

and international agreements on financial services are making financial markets ever
more contestable.

The third is: that effective market discipline depends on the harmonization of
standards . Global integration is creating a need for some degree of harmonization in
this area.

(i) Market forces and the rationale of Basel II

Technology, deregulation and liberalization have reinforced market competition,

locally and internationally. Banks now have significant operations beyond their
domestic borders and are handling a large amount of business and millions of non-
resident clients across the globe. In the process, large, internationally active financial
institutions with complex risk profiles have grown in size. Other domestic banks and
institutions are also forging stronger cross-border linkages by acquiring customers
abroad. Three related changes have also been important.

One: In the past, it was frequently the regulators who directly limited banks’
business and risk-taking and – very often – shielded banks from competition. Now
banks across various jurisdictions are able to take most of their own decisions – and
face the consequences. They also have to withstand more competition. These
developments have inevitably focused the minds of senior bank managements on the
significance of managing risks.

42
 Two: The economic context in which banks operate has changed. There is an
increasing emphasis on “shareholder value”, which leads banks to focus on improving
risk-adjusted profitability, rather than simply boosting business volumes. Banks are
more aware of risks in their business and of the need to use their scarce capital
resources effectively. They constantly develop and seek to improve sophisticated
tools for assessing, monitoring and managing risks.

Three: Banks now face increased competition from the alternative sources of
finance that open capital markets provide. At the same time, various capital market
instruments are now available to banks that can help them to manage their risk
profiles in a more flexible manner. Banks not only need to price their products based
on a better assessment of risks, but they also need to really understand the advanced
products that are available to mitigate or manage risks. The importance of market
discipline brings the second theme:

(i) The importance of market contestability

Technology and international agreements on financial services have already made

global banking a reality in many countries, and are increasingly doing so in many
others. This means that countries need to ensure that their banking and financial
markets can adapt to a more competitive environment. The “contestability”, or
“competition-friendliness”, of a market is the key issue here. The degree of
contestability varies directly with how easy it is for new firms to enter the market.
Increased competition enables the provision of a broader range of services, reduces
price distortions and cuts costs for firms and households. It also helps to transfer new
technology and skills into the market, as well as new products and management
techniques, which improve the overall efficiency of the market. Contestability has
various dimensions The partial privatization of public sector banks in India –
involving a substantial injection of private shareholding – has been a notable step
forward. So too has the establishment of 12 new private sector banks since 1993.
Foreign direct investment (FDI) in the financial sector is also very important. A recent
comprehensive report by the CGFS found that local banks’ exposure to global
competition boosted the efficiency of the local financial sector in a lasting way.
Competition from foreign firms forces local banks to reassess their lending practices.

43
The result has often been better risk management 1 and more diversified lending
portfolios – and hence safer banks. The steps taken by India in recent years to allow
greater FDI in domestic private sector banks and to permit the establishment of
foreign banking subsidiaries in India are therefore to be welcomed.

(ii) Harmonization of standards

The three themes: that effective market discipline depends on the harmonization of
standards. As barriers to the establishment of foreign banks and to the cross-border
provision of financial services come down, increased attention is being given to the
harmonization of accounting standards and arrangements across countries. This is not
a goal that is easily attained. The fundamental challenge is to find sufficient common
ground for an international framework that promotes broadly consistent results – or a
“level playing field” – in the face of the very real differences that exist across
countries in terms of legal systems, market practices and business conditions. Finding
such common ground invariably involves compromise, which means that the result is
unlikely to be that which a country acting on its own would have adopted. The
process of harmonization of accounting standards began several years ago and is
being coordinated by the International Accounting Standards Board (IASB). A
number of international financial reporting standards (IFRS) have been finalized and
have been applicable to all listed companies in the European Union since 1 January
2005. Several other countries have also adopted IFRS as their national accounting
standards. It is estimated that more than 90 countries will either permit or require the
use of IFRS before or during 2007 for publicly traded companies. In addition, a
number of other countries are putting in place a formal policy to bring their national
standards into line with IFRS. The Securities and Exchange Commission of the
United States has also expressed strong support for convergence between IFRS and
the United States’ Generally Accepted Accounting Principles (US GAAP). The
Financial Accounting Standards Board (FASB) of the US and the IASB are now
working towards finding common ground between IFRS and US GAAP. Many of
the Indian commercial banks currently prepare their statements under US GAAP, in
addition to adhering to Indian accounting standards. Convergence between Indian and
international accounting standards has been adopted as a formal policy of the Institute
of Chartered Accountants of India. Moreover, India has been involved in the

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Standards Advisory Council of the IASB, which meets periodically to inform and
advise the IASB on various issues relating to accounting standards. All this is
welcome. Adopting common financial reporting should be a major step towards
improving the efficiency of international financial markets. It will reduce barriers to
both trade and the flow of capital. Investors will have access to more reliable financial
data to assess corporate performance in many jurisdictions.

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 CASE STUDY WITH SBI

CASE STUDY WITH SBI

International Banking services of State Bank of India are delivered for the benefit of
its Indian customers, non-resident Indians, foreign entities and banks through a
network of 67 offices/branches in 29 countries, spread over all time zones. The
network is augmented by a cluster of Overseas and NRI branches within India and
correspondent links with over 522 banks, the world over. Bank's Joint Ventures and
Subsidiaries abroad further underline the Bank's international presence. The Bank has
carved a niche for itself in the Euro land with branches located in Antwerp, Paris and
Frankfurt. Indian banks and corporate are able to avail single-window Euro services
from the Bank's Frankfurt branch. These services include:-

A. TRADE FINANCE

Trade finance includes gamut of services which include credit for both pre shipment
and post shipment activities. These primarily include:-

 Export Avenue
 Rupee Export Credit (Pre-Shipment and Post-Shipment)

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PRE-SHIPMENT EXPORT CREDIT:-

Pre- Shipment credit (Packing Credit) is extended to the exporters for financing
purchase, processing, manufacturing or packing of goods prior to shipment. This
would mean any loan or advance can be extended by SBI on the basis of:

a) Letter of Credit opened in the favor of the customer or in favor of some other
person, by an overseas buyer

b) A confirmed and irrevocable order for the export of goods from India.

c) Any other evidence of an order or export from India having been placed on the
exporter or some other person, unless lodgment of export order or Letter of Credit
with the bank has been waived.

Packing Credit is granted for a period depending upon the circumstances of the
individual case, such as the time required for procuring, manufacturing or processing
(where necessary) and shipping the relative goods. Packing credit is released in one
lump sum or in stages, as per the requirement for executing the orders/LC. The pre-
shipment / packing credit granted has to be liquidated out of the proceeds of the bill
dawn for the exported commodities, once the bill is purchased/discounted etc.,
thereby converting pre-shipment credit into post-shipment credit.

POST-SHIPMENT EXPORT CREDIT:-

SBI extend Post-shipment Credit that is any loan / advance granted or any other credit
provided by SBI for purposes such as export of goods from India. It runs from the
date of extending credit, after shipment of goods to the date of realization of export
proceeds and includes any loan / advance granted on the security of any duty
drawback allowed by the Govt. from time to time. Post-shipment credit has to be
liquidated by the proceeds of export bills received from abroad in respect of goods
exported.

The exporter has the following options at post-shipment stage:

i. To get export bills purchased /discounted / negotiated;

47
ii. To get advances against bills for collection;

iii. To receive advances against duty drawback receivable from Govt.

The exporter has the option to avail of pre-shipment and post-shipment credit either in
rupee or in foreign currency. However, if the pre-shipment credit has been availed in
foreign currency, the post-shipment credit has necessarily to be under EBR Scheme
since foreign currency pre-shipment credit has to be liquidated in foreign currency.

 Pre Shipment Credit in Foreign Currency (PCFC)

SBI‘s Pre-shipment Credit in Foreign Currency (PCFC) facilitates funds in foreign

currency. SBI’s PCFC gives the choice of four different currencies in which to
operate the scheme - the US Dollar, Pound Sterling, Euro and the Japanese Yen. SBI
has 64 branches across the country handling the PCFC facility for the customers’
exclusive convenience. The Bank’s Foreign Department, based at Calcutta, is the
nodal centre for raising and deploying offshore and onshore funds for lending under
PCFC.

How do the schemes operate?

PCFC & EBR schemes go hand in hand. The operation of these schemes is in three
stages, viz.

i) Disbursement of PCFC

ii) Disbursement of EBR and simultaneous repayment of PCFC and

iii) Repayment of EBR.

When the exporter has sufficient drawing power available within his overall limit to
accommodate the proposed PCFC advance, PCFC is made available to him either in
foreign currency for payment of his import bills or in Indian rupees for purchase of
domestic raw material by converting the foreign currency of PCFC at T.T. Buying
rate. PCFC is operated like cash credit account with balances in foreign currency. The
liability of the exporter to the Bank on account of PCFC is in foreign currency. The
rupee equivalent will be shown in the account only at notional rates which really
doesn't concern the exporter. Interest on PCFC will be arrived in foreign currency and

48
the rupee equivalent thereof will be recovered at quarterly intervals from the
exporter's CC or Current account.

 Export Bill Rediscounting

The EBR advance which is a foreign currency loan will be eventually closed when the
overseas buyer pays the bill and the export proceeds are realized.

 LETTER OF CREDIT

SBI offers Letters of Credit to facilitate purchase of goods in international trading

operations. The bank's vast network of branches and correspondent banks enables
one’s enterprise to sustain a seamless flow of business on a wide platform. Further,
the bank's informed trade finance crew can provide with sophisticated credit and trade
information, and market knowledge, helping to extract more value from business.
Since the Bank establishing the Letter of Credit undertakes the responsibility of
honoring the drafts drawn there under, the ability of the importer to meet its
obligation, the integrity of the exporter, the nature of goods, besides observance of
Exchange Control regulations etc. are considered.

 IMPORT AVENUE

Foreign Currency import credit

This facility is ideal for both Indian importers and their foreign suppliers. SBI offers
credit to foreign suppliers of Indian importers by purchasing the import bill for its full
value through one of the bank's overseas offices. The tenor of this form of supplier's
credit does not exceed 180 days. The supplier gets 100 per cent of the invoice value
immediately, making his deal practically a cash sale. Importers get credit for a
maximum period of 180 days, enabling them to manage their liquidity better. Further,

49
their interest payables could be lower since international interest rates are currently
lower than domestic rates. These facilities are useful for import by sellers in the
domestic market as well as export-related import.

 Supplier's credit

Suppliers' Credit essentially represents credit sales affected by the supplier on the
basis of accepted bills or promissory notes with or without a collateral security. Any
credit facility arranged with recourse to the supplier for financing upto 180 days
import into India which is not backed up in the form of any
letter/document/guarantee/agreement, etc. issued by the LC opening banks or in any
other manner except normal routine commercial transactions like an LC, can be
treated as a suppliers' credit. The underlying commercial contract between the
exporter and the Indian importer should provide for drawing of usance drafts with an
upper cap of 180 days on the usance period. When documents under such usance LCs
are discounted by our foreign offices and other banks, it is not based on any
mandate/letter of comfort/guarantee given by the LC opening bank in India either on
their own behalf or at the instance of the importer, i.e. the buyer of goods. Indian
importers are free to enjoy a credit period of 180 days on their imports from the date
of shipment provided interest for the period does not exceed the prime rate for the
currency in which the goods are invoiced. Prior approval of RBI/GOI was required for
exceeding this time limit, till September 2002. With a view to simplifying the
procedure for imports into India, RBI, in September 2002, decided that the
Authorized dealers may approve proposals received in form ECB for short term credit
for financing, by way of Suppliers' Credit, of import of goods into India, provided.
The credit is being extended for a period of less than 3 years. The amount of credit
does not exceed USD 20 million (approx. Rs. 94 crores now) per import transaction.

50
B. CORRESPONDENT BANKING

The Correspondent Banking Division develops and maintains relationship with Banks
and Financial Institutions across the Globe. This network Correspondent Banks forms
the foundation for all international operations of SBI. SBI has correspondent banking
relations with around 522 leading banks worldwide. The Rupee Vostro accounts of
International Banks and Institutions are maintained and serviced at SBI’s International
Services branch (ISBM) at Mumbai and at Overseas Branches at Kolkata (Calcutta),
Chennai, Cochin, Bangalore and New Delhi. ACU accounts are also serviced at the
overseas branches.

C. MERCHANT BANKING

SBI’s Merchant Banking Group is strongly positioned to offer perfect financial

solutions to the respective business. It provides the resources, convenience and
services to meet the needs of the customer by arranging Foreign Currency credits
through:

• Commercial loans

• Syndicated loans

• Lines of Credit from Foreign Banks and Financial Institutions

• FCNR loans

• Financing of Imports.

Products and services include:-

1) Arranging External Commercial Borrowings (ECB)

2) Arranging and participating in international loan syndication

3) Loans backed by Export Credit Agencies

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D. PROJECT EXPORT FINANCE

State Bank of India is an active participant in the area of finance of Project export
activities. These activities will mainly involve financing the fund based and non fund
based requirements of the project exporters. Project export contracts are generally of
high value and exporters undertaking them are required to offer competitive terms to
be able to secure orders from foreign buyers in the face of stiff international
competition. SBI’s vast network of branches spread all over the country which are
authorized to handle trade related transactions, substantial presence overseas with
branches/offices in all major commercial centers of the world covering all time zones
and strong network of correspondent relationship with top ranking banks in several
countries adds to the competitive strengths to facilitate and meet various requirements
of project exporters. Credit facilities offered:- Various types of credit facilities, both
non fund and fund based that project exporters may need at the time of bidding and /
or for execution of the project is extended by the Bank.

Non Fund Based Facilities

Letter of Credit facility on behalf of our customer enabling him to import raw material
required for manufacturing goods for project export is provided by the Bank and also
all other following types of guarantees required for project export contract are issued
by SBI:-

 Bid Bond Guarantee

 Advance Payment Guarantee

 Retention Money Guarantee

 Maintenance Guarantee

Fund based facilities include:-

I. Pre-shipment credit both in Indian rupees and in foreign currency to extend

financial assistance for procuring/ manufacturing/ processing/ packing/ shipping
goods meant for export.

52
II. Rupee/ Foreign currency supplier's credit: - When a project export is on
deferred credit terms, we meet the financial requirement of our exporter in Indian
rupees or foreign currency.

IV. Buyer’s credit: Bank also participates in grant of credit to foreign buyers
under the Buyer’s Credit Scheme’ of Exim Bank.

E. EXPORTER GOLD CARD

State Bank of India has launched "SBI EXPORTERS GOLD CARD SCHEME" to
meet the working capital needs of exporters with good track record and credit
worthiness, subject to their fulfilling the specified eligibility norms. The salient
features of the scheme are as under:

Assessment norms have been simplified and for units with export turnover up to Rs.
100 crore. Standby limit of 20% will be sanctioned to all the SBI Exporters Gold Card
holders over and above the sanctioned limit to meet credit demands arising out of
receipt of sudden orders. Limits sanctioned will be valid for a period of three years.

Interest will be charged at concessional rate from the Gold Card holders. The present
rate for Packing Credit up to 180 days and Post-shipment credit up to 365 days would
be 3.75% below the Bank's benchmark Prime Lending Rate. Also, SBI Gold Card
holders will be given preference for grant of packing credit in foreign currency.

F. OBU (OFFSHORE BANKING UNIT)

State Bank of India has opened the first Offshore Banking Unit (OBU) in India at the
Special Economic Zone, New Bank Building, Andheri (East) Mumbai 400,096 on
17th July 2003 - another landmark in the history of India's Financial Sector.

G. USA PATRIOT ACT CERTIFICATION

Following the USA PATRIOT Act and the final rules issued by the U.S. Department
of Treasury, Banks ("Foreign banks") are required to issue Certification to U.S. banks
or broker-dealers in securities ("Covered Financial Institutions") with which they
maintain Correspondent accounts. For this purpose and as permitted by the final
rules, State bank of India has prepared a Certification for use by any financial
institution that needs a USA PATRIOT Act Certification from State Bank of India or

53
one of its branches. UCO Bank all set to slug it out news Venkatachari Jagannathan
18 June 2002

 MERCHANT RATES AND FEES WITH REGARDS TO

INTERNATIONAL BANKING:-

A Merchant Account has a variety of fees, some periodic, others charged on a per-
item or percentage basis. Some fees are set by the merchant account provider, but the
majority of the per-item and percentage fees are passed through the merchant account
provider to the credit card issuing bank according to a schedule of rates called
interchange fees, which are set by Visa and MasterCard. Interchange fees vary
depending on card type and the circumstances of the transaction. For example, if a
transaction is made by swiping a card through a credit card terminal it will be in a
different category than if it were keyed in manually.

DISCOUNT RATES

The discount rate comprises a number of dues, fees, assessments, network charges
and mark-ups merchants are required to pay for accepting credit and debit cards, the
largest of which by far is the Interchange fee. Each bank or ISO/MLS has real costs in
addition to the wholesale interchange fees, and creates profit by adding a mark-up to
all the fees mentioned above. There are a number of price models banks and
ISOs/MLSs use to bill merchants for the services rendered. Here are the some price
models:

TIER PRICING

The 3-Tier Pricing is the most popular pricing method and the simplest system for
most merchants, although the new 6-Tier Pricing is gaining in popularity. In 3-Tier

54
Pricing, the merchant account provider groups the transactions into 3 groups (tiers)
and assigns a rate to each tier based on a criterion established for each tier.

QUALIFIED RATES

A qualified rate is the percentage rate a merchant will be charged whenever they
accept a regular consumer credit card and process it in a manner defined as "standard"
by their merchant account provider using an approved credit card processing solution.
This is usually the lowest rate a merchant will incur when accepting a credit card. The
qualified rate is also the rate commonly quoted to a merchant when they inquire about
pricing. The qualified rate is created based on the way a merchant will be accepting a
majority of their credit cards. For example, for an internet merchant, the internet
interchange categories will be defined as Qualified, while for a physical retailer only
transactions swiped through or read by their terminal in an ordinary manner will be
defined as Qualified.

MID- QUALIFIED RATES

Also known as a partially qualified rate, the mid-qualified rate is the percentage rate a
merchant will be charged whenever they accept a credit card that does not qualify for
the lowest rate (the qualified rate). This may happen for several reasons such as a
consumer credit card is keyed into a credit card terminal instead of being swiped and
special kind of credit card is used like a rewards card or business card

A mid-qualified rate is higher than a qualified rate. Some of the transactions that are
usually grouped into the Mid-Qualified Tier can cost the provider more in interchange
costs, so the merchant account providers do make a markup on these rates. The use of
"rewards cards" can be as high as 40% of transactions. So it is important that the
financial impact of this fee be understood.

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NON- QUALIFIED RATES

The non-qualified rate is usually the highest percentage rate a merchant will be
charged whenever they accept a credit card. In most cases all transactions that are not
qualified or mid-qualified will fall to this rate. This may happen for several reasons
such as:

• A consumer credit card is keyed into a credit card terminal instead of being
swiped and address verification is not performed

• A special kind of credit card is used like a business card and all required fields
are not entered

• A merchant does not settle their daily batch within the allotted time frame,
usually past 48 hours from time of authorization.

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 CONCLUSION

Banks have influenced economies and politics for centuries. Historically, the primary
purpose of a bank was to provide loans to trading companies. Banks provided funds to
allow businesses to purchase inventory, and collected those funds back with interest
when the goods were sold. For centuries, the banking industry only dealt with
businesses, not consumers. Banking services have expanded to include services
directed at individuals, and risk in these much smaller transactions is pooled.

International banking has become an important aspect of world economy. It deals

with various aspects of financial services. Banks offer many different channels to
access their banking and other services.

Though international banking concept is quite old, it has acquired certain new
characteristics and dimensions. Now international banking has become a very
important for international trading and financial transaction. Its importance is
increasing through the globalization of world economy and we will see its benefits in
the near future very soon.

BIBILIOGRAPHY

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Reference Books & Journals

 Indian Financial system – Khan M. Y.

 International Banking & Finance - ICFAI
 Financial Institution & Market – L. M. Bhole
 Indian Banking – Mr. Chanda

Websites

 www.banknetindia.com
 www.rbi.org
 www.google.com
 www.sbi.com

News papers & Magazines

 Economic Times
 Bank Management – ICFAI

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