International Banking:

Foreign Exchange and Trade

Finance

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 International Banking Services

International Banks do everything domestic banks

do and in addition:
 Arrange trade financing.
 Arrange foreign exchange.
 Offer hedging services for foreign currency receivables
and payables through forward and option contracts.
 Offer investment banking services (where allowed).

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 Types of International Banking
Organizations
Representative office

A small service facility staffed by parent bank personnel
that is designed to assist MNC clients of the parent bank
in dealings with the bank’s correspondents.
 No deposit acceptance and Loan disbursements
 Reps looks for foreign market opportunities and serves as a liaison
between parent and clients
 Useful in newly emerging markets

Representative offices also assist with information about
local business customs, and credit evaluation of the
MNC’s local customers.

Most of the Indian banks have their reps offices abroad.
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 Types of International Banking
Organizations
Agency office

Does not accept the deposits but provide
some of the facilities e.g. issuance of Letter
of Credit, providing technical assistance,
advising customers, managing their portfolio
etc.

More complete than a representative office

Examples ??
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 Types of International Banking
Organizations
Foreign Branch Office

A foreign branch bank operates just like a local bank, but is
legally part of the parent.
 Subject to both the banking regulations of home country and
foreign country.
 Reasons for establishing a foreign branch

 More extensive range of services

 Foreign branches are not subject to Canadian reserve requirements or
deposit insurance
 Compete with host country banks at the local level
 Most popular means of internationalizing bank operations
 E.g. SBI has branches of the parent in Colombo, Dhaka, Frankfurt,
Hong Kong, Tehran, Johannesburg, London, Los Angeles, Male in
the Maldives, Muscat, New York, Osaka, Sydney, and Tokyo. 5
 Types of International Banking
Organizations
Subsidiary Bank

A subsidiary bank is a locally incorporated bank that is
either wholly owned or owned in major part by a foreign
parents.

Subsidiary operate under the banking laws of the country in
which they are incorporated.

E.g. ICICI Bank UK PLC and ICICI Bank Canada are the subsidiaries
of ICICI Bank, State Bank of India (California), State Bank of India
(Canada) are the subsidiaries of SBI Bank ( Source: wikipedia)

In Kenya, State Bank of India owns 76% of Giro Commercial Bank,
which it acquired for US$8 million in October 2005( Source: wikipedia)
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Affiliate Bank

An affiliate bank is one that is only partially
owned, but not controlled by its foreign
parent.

Examples ??
 Indo-Zambia Bank Ltd. (Lusaka) an affiliate of
Bank of Baroda

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 Types of International Banking
Organizations
Joint Ventures

A bank concerned about risk exposure by entering into new
market may opt for this

Lack of expertise and lack of customer client base abroad

Or a bank may choose to provide only specific services than
the full range
 E.g. Bank of Baroda (BoB), Indian Overseas Bank (IOB) and
Andhra Bank, three India's state-run lenders, are going to enter
Malaysia soon for rendering banking services, through a joint
venture.
 SBI Custodial Services, is a joint venture between Société Générale
Securities Services (SGSS) and SBI. This entity is launching Custody
and Fund Administration services in India.
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 Types of International Banking
Organizations
Offshore Banking Center

A country whose banking system is organized to permit external
accounts beyond the normal scope of local economic activity.

The host country usually grants complete freedom from host-
country governmental banking regulations.
 Banks operate as branches or subsidiaries of the parent bank
 Primary credit services provided in currency other than host country
currency
 Reasons for offshore banks
 Low or no taxes, services provided for nonresident clients, few or no FX
controls

The IMF recognizes the Bahamas, Bahrain, the Cayman Islands,
Hong Kong, the Netherlands Antilles, Panama, Singapore as
major offshore banking centers
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 Offshore Banking Center

Few Indian banks, such as State Bank of India, Indian
Overseas Bank, Bank of India and Bank of Baroda, have set
up offshore banking units for deposit taking and final
lending at Bahrain, Hong Kong, Colombo, Cayman Islands,
and so on

The State Bank of India has Offshore Banking Units in
Kochi, Kandla and Surat after the success of its first unit at
the SEEPZ (Santacruz Electronics Export Processing
Zone) special economic zone in Mumbai

ICICI, PNB and BOB also have offshore banking office in
SEEPZ
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 Task

Find out the subsidiary branches of foreign

banks in India

What is RBI’s stand on this?

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 Foreign Exchange: Basic Concepts

Exchange Rate
 Is the price of one currency in terms of another currency

Forex Market
 the existence of a number of currencies gives rise to the
need to transact in these currencies
 Over the counter Market i.e. No Physical Market

Network of Banks, Brokers & Dealers spread across the
financial centers of the country
 Participants are Large Commercial Banks, brokers, Big
Corporations and Central banks

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 Foreign Exchange: Basic Concepts

Retail Market (banks dealing with retail customers) Vs

Wholesale Market (interbank dealings)

24 hrs. Market

London, New York and Tokyo the Biggest

Nostro and Vostro Account
 Local bank maintaining account with its subsidiary or a foreign bank
for the purpose of forex transactions is called Nostro and when the
same transaction is seen from foreign bank’s side, becomes vostro.
 E.g. the account held by state bank of India with bank of America in
New York is a Nostro account of the state bank of India. For banl of
America it becomes Vostro account
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 Exchange Rate Quotations

Direct or Indirect
E.g. INR/1USD = 47.7920 or INR/1 Euro =
65.3544
1 USD/ INR = 0.02090 or 1Euro/ INR = 0.0156

American Vs European Quote (one of the
currencies is USD)
 E.g. Rs. 47.79/$ = European , $ 0.02090/Rs.=
American

One way Vs Two way Quotations
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 Exchange Market Mechanism

Merchant Transactions( with retail

customers) and Inter-Bank Transactions

Arbitrage ??

Note: FEDAI rule says to quote the exchange
rate upto 4 decimals and spread as a multiple
of 0.25 units

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 Types of Transactions

Spot Vs Forwards/Futures

Currency is said to be at Discount or
Premium w.r.t. another currency when
 Future prices > Current Spot Prices (premium)
 Future prices < Current Spot Prices (discount)

Broken Date Forward Contracts

SWAPS
 Why Banks Using SWAPS ??
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 Types of Transactions

Types of Merchant Transactions

 Telegraphic Transfers or Telex or TT
Buying/ Selling
 Mail Transfer

 Bills Buying/ Selling

 Travelers' Cheques

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Trade Finance

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 What is it ?

Trade finance is related to international trade, While a seller (the exporter) can require
the purchaser (an importer) to prepay for goods shipped, the purchaser (importer) may
wish to reduce risk by requiring the seller to document the goods that have been
shipped.

Banks may assist by providing various forms of support. For example, the importer's
bank may provide a letter of credit to the exporter (or the exporter's bank) providing
for payment upon presentation of certain documents, such as a bill of lading. The
exporter's bank may make a loan (by advancing funds) to the exporter on the basis of
the export contract.

Other forms of trade finance can include credit insurance,
export factoring, forfaiting and others.

In many countries, trade finance is often supported by quasi-government entities
known as export credit agencies that work with commercial banks and other financial
institutions.

E.g. EXIM Bank in India is the premier institute for export financing, ECGC provides
Guarantees and Insurance for Export Business in India
Source: wikipedia 19
 Trade Finance Modes

Cash-in-Advance

Letters of Credit

Factoring

Forfaiting

Pre-Shipment Finance

Post-Shipment Finance

Export Insurance

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 Trade Finance Modes: Cash-in-Advance

With this payment method, the exporter can avoid credit risk, since
payment is received prior to the transfer of ownership of the goods.

Wire transfers and credit cards are the most commonly used cash-in-
advance options available to exporters. However, requiring payment in
advance is the least attractive option for the buyer, as this method creates
cash flow problems.

Foreign buyers are also concerned that the goods may not be sent if
payment is made in advance. Thus, exporters that insist on this method
of payment as their sole method of doing business may find themselves
losing out to competitors who may be willing to offer more attractive
payment terms.

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 Trade Finance Modes: Letters of Credit

Letters of credit (LCs) are among the most secure
instruments available to international traders.

An LC is a commitment by a bank on behalf of the buyer
that payment will be made to the exporter provided that the
terms and conditions have been met, as verified through the
presentation of all required documents.

The buyer pays its bank to render this service. An LC is
useful when reliable credit information about a foreign
buyer is difficult to obtain, but we are satisfied with the
creditworthiness of buyer’s foreign bank.

An LC also protects the buyer since no payment obligation
arises until the goods have been shipped or delivered as
promised.
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 Example of an LC transaction

1. The importer arranges for the issuing bank to open an LC in favor of the
exporter.
2. The issuing bank transmits the LC to the advising bank, which forwards it
to the exporter.
3. The exporter forwards the goods and documents to a freight forwarder.
4. The freight forwarder dispatches the goods and submits documents to the
advising bank.
5. The advising bank checks documents for compliance with the LC and
pays the exporter.
6. The importer’s account at the issuing bank is debited.
7. The issuing bank releases documents to the importer to claim the goods
from the carrier

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 Types of Letter of Credit LCs

Irrevocable LC

Confirmed LC

Unconfirmed LC

Revolving LC

Deferred Payment LC

Transferable LC

Back to Back LC

Anticipatory LC

Standby LC

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 Trade Finance Modes: Factoring

A factor is a bank or a specialized financial firm that performs financing

through the purchase of invoices or accounts receivable.

Export factoring is offered under an agreement between the factor and
exporter, in which the factor purchases the exporter’s short-term foreign
accounts receivable for cash at a discount from the face value, normally
without recourse, and assumes the risk on the ability of the foreign buyer
to pay, and handles collections on the receivables. Thus, by virtually
eliminating the risk of nonpayment by foreign buyers.

What do you mean by “without recourse” ?? Explore

SBI Global Factors Limited (SBIGFL) is the only provider of international
factoring, import factoring, domestic factoring and forfaiting services
under one roof in India.

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 How Does Export Factoring
Work?

The exporter signs an agreement with the export factor who selects an
import factor through an international correspondent factor network,
who then investigates the foreign buyer’s credit standing.

Once credit is approved locally, the foreign buyer places orders for
goods. The exporter then ships the goods and submits the invoice to the
export factor, who then passes it to the import factor who handles the
local collection and payment of the accounts receivable.

Limitations of Export Factoring
 Only exists in countries with laws that support the buying and selling

of receivables.
 Generally does not work with foreign account receivables having

greater than 180- day terms.

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 Trade Finance Modes: Forfaiting

Forfaiting is a method of trade finance that allows exporters to obtain cash

by selling their medium term foreign account receivables at a discount on
a “without recourse” basis.

A forfaiter is a specialized finance firm or a department in banks that
performs non-recourse export financing through the purchase of medium-
term trade receivables.

Similar to factoring, forfaiting virtually eliminates the risk of nonpayment,
once the goods have been delivered to the foreign buyer in accordance
with the terms of sale. However, unlike factors, forfaiters typically work
with the exporter who sells capital goods, commodities, or large projects
and needs to offer periods of credit from 180 days to up to seven years.

Most users of forfaiting have been large established corporations, although
small- and medium-size companies are slowly embracing forfaiting
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 Export Credit Scheme

Pre-Shipment Credit (Packing Credit)

Post Shipment Credit

Export Credit Insurance (by ECGC)

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