CORPORATE BANKING

 Corporate Banking is responsible for the

overall relationship management of major
corporate and institutional clients.
 Corporate Banking delivers a comprehensive
range of financial products and services to
many of the world’s top-tier corporate and
institutional clients..
SCOPE
 Corporate Banking represents the wide range of
banking and financial services provided to domestic
and international operations of large local corporates
and local operations of multinationals corporations.
Services include access to commercial banking
products, including working capital facilities such as
domestic and international trade operations and
funding, channel financing, and overdrafts, as well as
domestic and international payments, INR term loans
(including external commercial borrowings in foreign
currency), letters of guarantee etc.
 MAIN ACTIVITIES OF
CORPORATE BANKING
Corporate Banking
Project Finance
 Infrastructure Finance

 Syndication

 Underwriting & Advisory Services

 Carbon Credits Business

 Working Capital

 Cash Management Services

 Trade Finance

 Tax Payments

 Derivatives
FUNCTIONS OF BANKS
 Creating Money
 Creating an optimum money supply
 Transfer of funds
 Pooling of Savings
 Extension if Credit
 Financing of foreign trade
 Trust Services
 Safekeeping of Valuables
 Merchant-banking services
 Brokerage Services
CREDIT FUNCTION OF BANKS
 Overdraft
 Cash Credit
 Purchase or discounting of bills
 Working capital Loan
 Letter of credit

Up to July 4, 2008 non-food credit of scheduled

commercial banks (SCBs) rose by 25.9 per cent
(Rs.4,85,709 crore) on a year-on-year basis, higher
than 24.6 per cent (Rs.3,69,109 crore) a year ago.
TYPES OF LOANS GIVEN BY
INDIAN BANKS
 Working Capital Finance
 Project Finance
 Export credits
 Foreign currency loans
 Deferred Payment Gaurantees
 Corporate Term Loans
 Structured Finance
 Equipment Leasing
Loan Syndication
THE CREDIT PROCESS
 Credit analysis
 Collecting information of the borrower
 Appraising the project and financial statements
 Assessing the quality of the management team
 Doing due-diligence of the borrower
 assessing the risk associated with the proposed credit
 making the recommendation based on a thorough
analysis of the project.
 Credit delivery and administration
Some Regulations
 Loans/ advances granted to individuals against the security of shares, debentures and PSU
bonds should not exceed Rs.10 lakh and Rs.20 lakh, if the securities are held in physical
form and dematerialized form respectively.
 For WCR below 1 cr-the working capital requirement is to be assessed at 25% of the
projected turnover to be shared between the borrower and the bank, viz. borrower
contributing 5% of the turnover as (NWC) and bank providing finance at a minimum of 20%
of the turnover.
 For WCR limit above 1 cr-Banks are now free to decide on the minimum current ratio and
determine the working capital requirements according to their perception of the borrowers
and their credit needs.
 For WCR limit above 5 cr-min 5% requirement should be met with Bill finance.
 For WC limit above 1ocr-banks may persuade them to go in for the Loan System by offering
an incentive in the form of lower rate of interest on the 'loan component' as compared to
the 'cash credit component'
 Banks are allowed to fix separate lending rates for 'loan component' and 'cash credit
component'.
 The loan component , may be renewed/rolled over at the request of the borrower
 Banks are free to adopt loan syndication route.
 NBFCs should not be provided finance for on-lending to individuals for subscribing to IPOs.
 Loan to priority sector should be atleast 40% of net bank credit(32% for foreign banks).
 Total agricultural advances should be atleast 18% of net bank credit.
Contd..
 Priority sector constitutes Agriculture, SSIs and other activities/ borrowers.
 SSIs are those units in which investment of plant & machinery does not exceed 1 crore
(enhanced to 5 cr. for some industries specified by RBI.
 Tiny enterprises- investment is upto 25 lacs.
 Also includes term loans/loans in the form of line of credit to State Industrial dev corp/
SFCs for financing SSIs, credit given to KVIC, SIDBI, subscription of bonds floated by
SIDBI, SFCs, NSIC, NABARD, HUDCO etc.
 Ship breaking activity, small road and transport operators (SRWTO), retail traders dealing
in essential commodities, professionals and self-employed persons whose borrowing limits
do not exceed 10 lakhs of which not more than Rs. 2 lakhs should be for working capital
requirement, also considered as priority sector.
 Housing loans upto 5 lakhs in rural/semi urban sector and 10 lakhs in urban and metros
 Within the overall target of 32%, SSI advances have to be 10% and export credit to be
12% of net bank credit.
 Regarding working capital, long term funds should be used to finance CAs and bank
borrowings to be reduced progressively.
 The loan component should comprise more permanent req and demand cash credit portion
to take care of fluctuating req. This would bring financial discipline.
 Banks should not finace more than 40% of the cost of project in case of construction
activities apart from housing .
 No finance should be extended for infrastructural activities and construction of buildings
meant purely for govt/semi govt offices including municipal and panchayat offices.
Assets and Liabilities of
Banking System
 Assets
 Cash and Bank balances with Reserve Bank of India.
 Balances with banks and money at call and short notice.
 Investments (securities)
 Loans
 Fixed Assets
 Other Assets.
 Of these types of assets, investments, and loans and
advances - (about 40%) as a percentage of total assets.
 Of these assets of the banks, Cash and Balances with RBI, and
Balances with Banks and Money at Call and Short notice are the
most liquid assets. These two groups of assets put together occupy
about 10% to 12% of the total assets of banks,
 Investments by banks in Government Securities, Other Approved
Securities, and Non-Approved Securities- about 40%
Liabilities
 Capital
 Reserves and Surplus
 Demand Deposits
 Savings deposits
 Time deposits
 Inter-bank deposits
 Money market deposits
 Borrowings (short term and long term)
 Other Liabilities and Provisions
 Contingent Liabilities.
Financial Analysis of
Banking organizations
 ) Return on Equity
 b) Return on Investments
 c) Leverage or Debt to Equity or Debt to Capital
 d) Interest Income to Average Assets
 e) Interest Expenses to Average Assets
 f) Net Interest Income to Average Assets [(d) ñ (e)]
 g) Non-interest income to Average Assets
 h) Non-interest income to Total income
 i) Income from Treasury activities/Investments
 j) Operating Expenses to Average Assets
 k) Provision for Loans and losses to Average Assets
 l) Growth Rate of Assets
 m) Growth Rate of Net Worth
 n) Cash dividends to PAT
 o) Provision for NPA to Total Loan
Difference between
manufacturing firms and banks
 The manufacturing firm has 60% CA nd 40% FA
whereas bank has 77% CA & 3% FA.
 Current ratio of firm is 2 whereas bank has <1.
 Firm finance with 60% debt and 40%equity whereas
its assets with 90%debt and 10% equity.
 market value of bank assets are more volatile than
firms
 Hence greater the bank capital, the greater the
amount of safe assets and lower the amount of risk.
 Greater capital also enhances its earning potential.
Profitability of banks
 External Factors
 Credit targets given by the government
 Cash reserve ratio and statutory liquidity ratio.
 Norms relating to credit to deposit ratio.
 Internal factors
 Management of working capital
 Administration and operational efficiency
 Geographical factors
 Changes in the pattern of deposits and credit
 Level of overdues, bad debts and defaults
KPIs
Efficiency and Expense Control ratios
Operating efficiency=TOE/TA
Cost of funds=TIE/Total deposit and borrowings
Efficiency=Non-int Income/Net TI
Income productivity per employee
Tax ratio
Liquidity ratios
Demand to time deposit ratio
Demand deposits to total assets ratio
credt extended to total assets
Cash to total deposits
SLR to total invtts
Net loans to assets ratio
Risk ratios
Equity multiplier=TA/Equity
Equity to TA ratio
Capital adequacy ratio
Risk weighted assets to TA
Net NPAs to equity ratio
Net NPAs to assets ratio
Profitability
ROE
ROA
Profit margin
P/E ratio
Net interest margin
Yield spread
EPS
Interest cost to total assets ratio
CAMELS MODEL
 C- capital adequacy- to maintain capital
commensurate with the nature and extent of
risks.
 A- asset quality in order to minimize risks.
 M- Management quality
 E- earnings (not only amount of current earnings but
also expected earnings in future).
 L- liquidity
 S- sensitivity to market risk (sensitivity to interest
rates,exchange rates and prices etc).
ACCOUNTING FOR BANKING
TRANSACTIONS
 Cash book
 Cash balance book
 Cash Reserve book
 Day book
 Ledger (current account ledger, savings bank ledger, fixed
deposit ledger, investment ledger, general ledger)
 The accounts and balance sheets are required to be duly
 audited by statutory auditors (including branch auditors)
appointed with the approval
 of RBI. While international accounting standards are broadly
followed, specific
 valuation standards have been prescribed in respect of
investments and foreign
 exchange positions.
BANK CAPITAL
 Tier I Capital
 Paid-up capital
 Statutory reserves

 Disclosed free reserves

 Capital reserves representing surplus arising out of

sale proceeds of assets
Note- In computing Tier I capital, equity investment in
subsidiaries, intangible assets, and losses are
deducted. Tier I capital should not be less than 50 per
cent of total capital.
Bank capital is generally much less than 10%of
assets whereas non-financial firms may have capital
assets ratios in the range of 40-60%.
Tier II Capital
• Undisclosed reserves and cumulative perpetual Preference
shares
 Revaluation reserves (should be considered at a discount
of 55% for being treated as part of Tier II Capital).
• General provisions and loss reserves
• Hybrid debt capital instruments
• Subordinated debt (instruments in foreign currency)
• Limit on subordinated debt-bank’s aggregate investment in
Tier II bonds issued by other banks and financial institutions
shall be permitted up to 10 per cent of the investing bank’s
total capital.

Note-The total of Tier II elements should be limited to a

maximum of 100 per cent of total Tier I elements.
Other liabilities
 Deposits
 Borrowings
 Borrowings in India(call money market, bank
rediscounting scheme,refinance facaility from RBI
IDBI/NABARD/EXIM Bank,issue of unsecured
bonds
 Borrowings outside India (thru ADRs or
GDRs,overseas borrowings
 Note-Shareholders of Banks are not given voting
rights
Requirements under Banking
Regulation Act

 Banking companies, carrying on business in India must see to it that:

 a) Banking Company can issue only Equity Shares. (Section 12).

 b) The subscribed capital of a Banking Company (carrying on business in India)

 must be at least one-half of the authorized capital; and the paid capital must be at least
one-half of the subscribed capital (Section 12).

 c) The capital of a Banking Company consists only of ordinary or equity shares and such
preference shares as may have been issued before 1st July 1944.

 d) Private Banks registered as public limited companies under the Companies Act, 1956,
must have a minimum paid-up-capital of Rs.200 Crore.

 e) The Capital Adequacy Ratio (CAR) of all banks operating in India must be a minimum of
8%, and it should be 10% by 2002. Capital Adequacy Ratio refers to the percentage of
capital and reserves (after writing off bad debts) of a Bank to its assets.
Regulations regarding capital
and reserves
Regulations regarding
Reserves
1) Reserve Fund
Under Section 17 of the Banking Regulation Act, 1949-Reserve Fund must have 20% of net profits .
However, the Central Government is empowered to exempt any banking company from the
requirement on the recommendation of the Reserve Bank of India.
2) Capital Reserves
 Capital Reserve Account as shown in the Balance Sheet consists of the following components:
 i) Gains on sale of securities in the permanent category
 ii) A portion of the excess provision towards depreciation on investments (net of taxes)
 iii) The Banks have not resorted to any asset revaluation to improve Capital Adequacy Ratio because

3) Share Premium Reserve

 Premium on issue of share capital may be shown separately under this head.
4) Revenue and Other Reserves
 The expression ‘Revenue Reserve’ shall mean any reserve other than capital reserve.
 This item will include all reserves, other than those separately classified. The expression
‘reserve’ shall not include any amount written off or retained by way of providing for
depreciation, renewals or diminution in value of assets or retained by way of providing for any
known liability.
5) Balance of Profit
 Includes Balance of Profit after appropriations. In case of loss, the balance may be shown as a
deduction.
Banking Regulation
 In line with international best practices, India follows Basel Committee
on Banking supervision (BCBS).
 It was decided in October 1998 that the minimum Capital to Risk Asset
Ratio(CRAR) for banks should be enhanced from the existing 8 per cent
to 9 per cent with effect from the year ending March 31, 2000 and to
10% by March 31, 2002.
 implementation would require, upgradation of branch inter-
connectivity, human resource skills and database management.

 Banks have to maintain CRR of 8.75% and SLR of 25% .

 Maintain additional Tier I Capital of 5% on foreign currency position

limit approved by the Reserve Bank of India.
 Banks may use the credit ratings awarded by the credit rating agencies
for assigning risk weights for credit risk for capital adequacy purposes:
Credit Analysis and Research Ltd., CRISIL Ltd., Fitch India, and ICRA
Ltd. Fitch, Moody’s and Standard & Poor’s
Banking regulation-Contd.
 Claims on domestic sovereigns (Central and State Governments) will
attract a zero risk weight while those guaranteed by State
Governments will attract 20 per cent risk weight.
Claims on corporates will be risk weighted as per the ratings awarded
by the chosen rating agencies. Unrated claims on corporates will attract
a risk weight of 100 per cent.  Claims above Rs.50 crore
sanctioned/renewed on or after April 1, 2008 will attract a higher risk
weight of 150 per cent; this threshold will be lowered to Rs.10 crore
with effect from April 1, 2009
 Claims eligible for inclusion as regulatory retail portfolio, specified
claims secured by mortgage of residential property, loans and advances
to banks’ own staff meeting the specified conditions, and consumption
loans up to Rs.1 lakh against gold and silver ornaments shall attract a
preferential risk weight ranging between 20 per cent and 75 per cent.
 Claims in respect of a few specified categories such as venture capital
funds, commercial real estate, consumer credit including personal loans
and credit card receivables, capital market exposures, and claims on
non-deposit taking systemically important NBFCs will attract risk
weights of 125 per cent or 150 per cent.
 BASEL II

 Banks are required to maintain a minimum capital to risk-

weighted assets ratio (CRAR) of 9 per cent on an ongoing basis
 minimum Tier I ratio of at least 6 per cent. Banks below this
level must achieve this ratio on or before March 31, 2010.
 The floor has been fixed at 100 per cent, 90 per cent and 80
per cent for the position as at end-March for the first three
years of implementation of the Revised Framework.
 Banks are required to maintain, at both solo and consolidated
level, a minimum Tier I ratio of at least 6 per cent. Banks below
this level must achieve this ratio on or before March 31, 2010.
 Indian banks with offshore branches and foreign banks in the
country moved to Basel II requirements from March 31, the end
of the 2007/08 financial year. Other banks have until March
2009 to start complying with the Basel II norms.
MIN. CAPITAL REQUIREMENT
 Procedure
 Classify assets on the B/S into risk categories eg.
 Cash, bal with RBI 0
 Bal with other banks 20
 Invt. In govt. securities 2.5
 Invt where pymt of int and repymt of principal guaranteed by govt 2.5
 Other invt. Where not guaranteed 22.5
 Claims on commercial banks 22.5
 Deposits with SIDBI/NABARD 102.50
 Invtt in bonds issed by other banks 22.5
 Invtt in bonds issued by PFIs 102.5
 Housing loans to individuals 75
 Consumer credit 125
 Leased assets 100
 Loans guaranteed by govt. 0
 SSI advances guranateed by CGFTSI 0
 Loans given to staff 20
 Advances against term deposits,life isurance,NSCs 0
etc.
Procedure contd.
 Convert off-balance sheet contingent
liabilities to on- b/s by multiplying CL by
the ‘credit conversion factor’. eg;
 Bank guarantees,LCs etc 100
 Performance binds, warranties,stand-by
LCs 50
 Documentary credits 20
 Note issuing facilitie,revolving credit50
 Other commitments 50
 Sale & repurchase agreements 100
Procedure contd.
 Multiply the rupee amt of assets in each
category-funded and non-funded,converted
into the credit equivalent-by the appropriate
risk weights. This will give the amount of risk
weighted assets.
 For overall capital requirement- find the sum
of capital requirement for credit risk on all
credit exposures excluding items comprising
trading book on the basis of risk weights
given below and capital requirement for
market risks in the trading book.
Capital requirement for
market(interest risk) in the
trading book
 Trading books includes the following:
 Securities under AFT category
 Securities under AFS category

 Open gold positions

 Open forex position limits

 Trading positions in derivatives

 Derivates entered for hedging purposes

Procedure
A capital charge is applied to current market values of these
securities
Two separate charges are applied-a separate risk charge and a
general market risk
Capital Charges for specific risk
 Invtt in govt securities 0
 Invtt in other sec where pymt of int and repymt of principal are guaranteed by
state govts 0
 where not guranteed 1.8
 Invt in state govt- guaranteed where invt is non-performing 9

 Claims on banks including invts in securities guaranteed by banks: final maturity

6 months to less, .30
6-24, 1.1250
>24 mths) 1.8

 Instruments on subordinated debt instruments and bonds issued by other banks

for tier 2 capital 9
 Invt on MBS of residential assets of HFCs 6.75
 Invt in securitised paper pertaining to infrastructure facility 4.5
 All other invts (eg. Equity) 9

Capital Charges for market risk
 Calculate the modified duration of each instrument in the
portfolio. This measures price sensitivity.
 Apply the assumed change in yield to the modified duration of
each instrument between .6 and 1 percentage points,
 Slot the resulting capital charge measures into a maturity ladder
with fifteen time bands.
 Apply a 5% vertical disallowances to long & short positions in
each time band
 Finally, carry forward the net positions in each time band for
horizontal offsetting subject to the horizontal disallowances.
 Capital charge for specific risk and general market risk of 9% on
gross equity positions.
 The risk-weights for open positions in forex and gold is 100%
 The general market risk charge will be 9% on the gross equity
positions.
Operational risk mgmt
 This is the loss resulting from inadequate or
failed internal processes,people and systems
or from external events. This includes legal
risk but excludes reputation risk.
 Measures
 Developing an appropriate risk management
environment
 Identification,assessment,monitoring and
mitigation/control
 Role of supervisors
 Role of disclosures
MONEY AND CAPITAL
MARKET
 Money Market
 Money market is a market short term funds eg.
Call money market, bill market, short term loans
market, treasury bills, commercail paper,
certificate of deposits, money market mutual
funds etc.

Capital Market
Capital market is the market for long term funds.
MONEY MARKET
 CALL MONEY MARKET-The money market where investments are
made in the form of money at call (call money) is called the call money
market.
 It functions as an immediate source of short term funds thereby
ensuring the liquidity of the banking system.
 The major suppliers of money in the call money market are State Bank
of India, Life Insurance Corporation and Unit Trust of India. The major
borrowers are the nationalized banks, foreign banks and co-operative
banks.

 INTERBANK CALL MARKET- is a part of the domestic money market

from where banks borrow and lend on a daily basis.
 All scheduled commercial banks (private sector,public sector and
cooperative banks), financial institutions (term-lending
institutions,insurance companies) and mutual funds can participate in
this market.
MONEY MARKET
INSTRUMENTS
 Call Money: Money traded over night, i.e.,
amounts borrowed today have to be returned
the very next day.
 Notice Money: Money traded for 2 to 14 days.
 Term Money : Money traded for 15 days to 3
months.
 Bills Rediscounting: 15 days and up to a
maximum of 90 days.
 treasury bills : with maturity of 91 and
364days.
Money market instruments
 deposits and loans,
 repurchase agreements
 Treasury bills,
 bankers’ acceptances,
 commercial paper, and
 certificates of deposit.
When does Banks participate
in Money Market:
Take Debt –
 • When they fall short of statutory Reserve
requirements may be due to a change in
rates or next 2 points.
 • When they fall short of funds to meet
withdrawal requirements from customers
 • When they fall short of funds to lend at
more attractive rates
Loan Debt –
 • When they have surplus idle funds.
Role of government
 Fiscal policy
 Monetary policy
Role of Central Banks
 Firstly, the central bank could do this by setting a required reserve ratio, which would
 restrict the ability of the commercial banks to increase the money supply by loaning out
 money. If this requirement were above the ratio the commercial banks would have
 wished to have, then the banks will have to create fewer deposits and make fewer loans
 then they could otherwise have profitably done. If the central bank imposed this
 requirement in order to reduce the money supply, the commercial banks will probably be
 unable to borrow from the central bank in order to increase their cash reserves if they
 wished to make further loans. They might try to attract further deposits from customers by
 increasing their interest rates, but the central bank may retaliate by increasing the
 required reserve ratio.
 • The central bank can affect the supply of money through special deposits. These are
 deposits at the central bank, which the banking sector is required to lodge. These are
 then frozen, thus preventing the sector from accessing them, although interest is paid at
 the average treasury bill rate. Making these special deposits reduces the level of the
 commercial banks’ operational deposits, which forces them to cut back on lending.
 • The supply of money can also be controlled by the central bank by adjusting its interest
 rate, which it charges when the commercial banks wish to borrow money (the discount
 rate). Banks usually have a ratio of cash to deposits, which they consider to be the
 minimum safe level. If demand for cash is such that their reserves fall below this level,
 they will able to borrow money from the central bank at its discount rate. If market rates
 were 8%, and the discount rate were also 8%, then the banks could reduce their cash
 reserves to their minimum ratio, knowing that if demand exceeds supply they will be able
 to borrow at 8%. The central bank, though, may raise its discount rate to a value above
 the market level, in order to encourage banks not to reduce their cash reserves to the
 minimum through excess loans. By raising the discount value to such a level, the
 commercial banks are given an incentive to hold more reserves, thus reducing the money
 multiplier and the money supply.
 • Another way the money supply can be affected by the central bank is through its
 manipulation of the interest rate. This is akin to the discount rate mentioned above. By
 raising or lowering interest rates, the demand for money is respectively reduced or
 increased. If it sets them at a certain level, it can clear the market at level by supplying
 enough money to match the demand. Alternatively, it could fix the money supply at a
 certain rate and let the market clear the interest rates at the equilibrium. Trying to fix the
 money supply is not easy, so central banks usually set the interest rate and provide the
 amount of money the market demands.
 • The central bank may also affect the money supply through operating on the open
 market. This allows it to manipulate the money supply through the monetary base. It may
 choose to either buy or sell securities in the marketplace, which will either inject or
 remove money respectively. Thus, the monetary base will be affected, causing the
 money supply to alter. To illustrate this, suppose the central bank sold gilts(Risk-free
 bonds) worth $10 million. $10 million would flow from the deposits of the purchasers to
 the central bank, taking the $10 million out of the monetary base. To inject money into the
 economy, the central bank would have to buy the gilts.
 CanSetting a required reserve ratio
 CRR
Primary market and Secondary
Market
 Primary Market
The primary market deals in new issues of
equity and debt either publicy or privately
or in the form of a rights offer.
Secondary Market
The secondary market deals in trading of
existing stock, done by stock exchanges.
MAJOR PLAYERS
 The major players and their main role in the money market is
listed below :
 Player Role
 Central Bank Intermediary
 Government Borrowers/Issuers
 Banks Borrowers/Issuers
 Discount Houses Market Makers
 Acceptance Houses Market Makers
 Fis Borrowers/Issuers
 MFs Lenders/Investors
 FIIs Investors
 Dealers Intermediaries
 Corporates Issuers
Role of banks in Money
market
 Banks can participate in treasury bills,govt. securities,commercial
paper,CDs issued by RBI on behalf of Govt. Of India
 These measures included extending short selling in the Central
Government securities to five-day basis, introduction of ‘when issued’
market, permitting diversification of primary dealer (PD) business and
extension of the NDS-OM module to new participants such as qualified
mutual funds, provident funds and pension funds.
 HDFC Bank Limited was granted approval to take up the PD business
and it commenced operations with effect from April 2, 2007. Pursuant
to issuance of guidelines for banks undertaking the PD business, nine
banks took up PD business departmentally, hitherto carried on by their
group entities. With the inclusion of HDFC Bank, the total number of
PDs as on July 31, 2007 stood at 18, of which 10 are bank PDs and
eight are stand-alone PDs.
Role of Banks in Capital
Markets
 Banks have set up their subsidiaries who act as lead managers
and underwriters to the new issues in the primary market.
 Scheduled banks can act as ‘bankers to the issue’ by registering
themselves with SEBI.
 Merchant bankers deal in corporate counseling, project
counseling and pre-investment studies, capital restructuring,
credit syndication and project finance, issue management and
underwriting, portfolio management, non-resident investment,
working capital finance, acceptance credit and bill discounting,
mergers and acquisitions, venture capital, leasing finance,
foreign currency finance, fixed deposit broking, mutual funds
and relief to sick industries.
Bankers to the Issue
 The duties of banks include the
following:
 Acceptance of application and application
money.
 Acceptance of allotment or call monies.
 Refund of application monies.
 Payment of dividend or interest warrants.
Merchant Banking
 Activities in Merchant banking
 Merchant banking involves the following activities in India:
 Project Appraisal and financing
Loan Syndication
 Issue Management
Advisory / Consultancy Services
 Financing export of capital goods, ships, hydro-electric installations,
railways.
 Issue of foreign currency bonds
 Raising Euro-dollar loans
 Mergers, Acquisitions & Takeovers
 Valuation of assets
 Equipment leasing
 Promotion of investment trusts.
SPECTRUM OF SERVICES :
 Equity Issue (Public/Rights) Management
Debt Issue Management
 Private Placements
 Project Appraisals
 Monitoring Agency Assignments
 IPO Funding
 Security Trustee Services
 Agriculture Consultancy Services
 Corporate Advisory Services
 Mergers and Acquisitions
 Buy Back Assignments
 Share Valuations
 Syndication
ISSUE MANAGEMENT SERVICES :
 Project Appraisal
Capital structuring
 Preparation of offer document
 Tie Ups (placement)
 Formalities with SEBI / Stock Exchange / ROC etc.,
 Underwriting
 Promotion /Marketing of Issues
 Collecting Banker / Banker to an issue
 Post Issue Management
 Refund Bankers
 Handling of Dividend Warrant/Interest Warrant Payments
 Debenture Trusteeship
Regulations on Capital Market
FOREIGN EXCHANGE
 DEFINITION:
 The exchange rate is simply the price of one currency in terms of another. It is the
ratio in which they are exchanged or prices in terms of each other are known as
exchange rates.

 There are two methods of expressing it:

 1. Domestic currency units per unit of foreign currency - for example, taking the
pound sterling as the domestic currency, on 16 August 1997 there was approximately
£0.625 required to purchase one US dollar.
 2. Foreign currency units per unit of the domestic currency - again taking the pound
sterling as the domestic currency, on 16 August 1997 approximately $1.60 were
required to obtain one pound.
 i.e.second method is merely the reciprocal of the former.
 A rise in the pounds per dollar exchange rate from say £0.625/$1 to £0.70/$1
means that more pounds have to be given to obtain a dollar, this means that the
pound has depreciated in value or equivalently the dollar has appreciated in
value.
 A rise in the exchange rate from $1.60/£1 to say $1.80/£1 would mean that
more dollars are obtained per pound, so that the pound has appreciated
NEED FOR FOR-EX
 To permit transfers of purchasing power
denominated in one currency to another-that
is to trade one currency for another currency.
 In the spot market currencies are traded for
immediate delivery, which is actually within
two business days after the transaction has
been concluded
 In the forward market contracts are made to
buy or sell currencies for future delivery.
FOREIGN EXCHANGE MARKET
 Foreign exchange market is the market where the currency of one country is traded for
that of another country and where the rate of exchange is determined.
 This is used in international trade, foreign investment, lending and borrowing of foreign
currency.
 This primarily functions through telephone and telex.
 The foreign exchange market is an over-the-counter market; this means that there is no
single physical or electronic market place or an organized exchange (like a stock exchange)
with a central trade clearing. Mechanism where traders meet and exchange currencies, the
market itself is actually a worldwide network inter-bank traders, consisting primarily of
banks, connected by telephone lines and computers.
 It is the largest financial market in the world.
 It is a highly sophisticated financial markets.
 The daily turnover in this market in mid – 2000s was estimated to be about $1600 billion.
 London, Tokyo, New York, Frankfurt, and Zurich are major centres of forex market.
 Most of the trading, however, is confined to a few currencies: the US dollar ($), the
Japanese Yen, the Euro, the German deutsche mark (DM), the British pound sterling, the
Swiss France (SF), and the French franc (FF).
 The turnover in forex market including derivative products futures, options and swaps is
around Rs. 1.9 trillion US dollars a day in 2008.
 5% of forex market turnover relates to trade flows, 15% for capital flows and 80% is the
dealing that banks do amongst themselves.
 This market is relatively free of regulations and central banks lay down capital standards
and voluntary codes of conduct. There are no regulations for investor protection and
transparency.
Foreign Exchange Market
 While a large part of inter-bank trading takes place with electronic
trading systems such as Reuters Dealing 2000 and Electronic Broking
Systems, banks and large commercial, that is,corporate customers still
use the telephone to negotiate prices and conclude the deal.
 Geographically, the markets span all the time zones from New Zealand
to the West Coast of the United States.
 Thus, the market functions virtually 24 hours enabling a trader to offset
a position created in one market using another market
 The five major centers of inter-bank currency trading, which handle
more than two thirds of all forex transactions, are London, New York,
Tokyo, Zurich, and Frankfurt. Transactions in Hong Kong, Singapore,
Paris and Sydney account for bulk of the rest of the market.
 The most heavily traded currency is the US dollar, which is known as a
vehicle currency - because it is widely used to denominate international
transactions
Characteristic Features
 24-hour open-market
 World-wide market:No single location no
geographical constraint
 Large capital and trade flows.
Currencies and Their Symbols
Codes for selected currencies
 USD: US Dollar EUR: Euro
 GBP: British Pound IEP: Irish Pound (Punt)
 JPY: Japanese Yen CHF: Swiss Franc
 CAD: Canadian Dollar AUD: Australian Dollar
 DEM: Deutschemark SEK: Swedish Kroner
 NLG: Dutch Guilder BEF: Belgian Franc
 FRF: French Franc DKK: Danish Kroner
 ESP: Spanish Peseta ITL: Italian Lira
 INR: Indian Rupee SAR: Saudi Riyal
MAIN PARTICIPANTS OF
FOREX MKT-a 2 tier structure
 Retail clients-businesses, international investors,
multinational corporations
 Commercial banks-for retail clients or for themselves
to alter the structure of their assets and liabilities in
different currencies.
 Foreign exchange brokers-they collect buy and sell
quotations for most currencies from many banks, so
that the most favorable quotation is obtained quickly
and at very low cost.
 Central banks-central banks-frequently intervene to
buy and sell their currencies in a bid to influence the
rate at which their currency is traded.
Structure of Foreign Exchange Markets
PARTICIPANTS
Quoting of Exchange rates
 Spot rate- is the rate at which the foreign currency rates are quoted
for immediate delivery.
 Forward rate-- is the rate at which the foreign currency rates are
quoted for future delivery. These are the 30-day, 90-day, and 180-day
forward prices.

 Direct Quote- Home currency is quoted per unit of foreign currency .

The direct quoted takes the value of the currency as unity.In India,
direct quote is used.Eg:
 Rs. 40= US $ 1 40 units of home currency for 1 unit of foreign
currency.
 FFr 3.3 = DM1 3.3 units of French Franc for 1 unit of deutche mark.

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

home currency
 Example: US $ 2.857=Rs.100.

 Dealers quote all currencies against the dollar since its is the
world’s dominant currency and simplifies work.
QUOTES
 Quotes are always given in The first rate is the buy, or bid, price: the
second is the sell, or ask, or offer, rate.
 Bid Price-Buying price of the dealer.
 Ask or offer price- Selling price of the dealer.
 Percent spread =( Ask price - Bid price)/Ask Price x 100
 Eg: USD/EUR .9670/.9682, USD/GBP .7121/.7126

 Cross rates -is the price of any currency other than the home currency.
In India, a cross rate is any exchange rate which excludes Rupees. Given
that:
USDIINR I-month forward: 47.6955/47.6965
USD/CHF I-month forward: 1.4550/1.4555
The synthetic CHF/INR I-month forward quote is:
CHF/INR I-month forward = (47.6955/1.4555)/(47.6865/1.4550) =
32.7691/32.7811
 A currency pair is denoted by the 3-letter SWIFT codes for the two
currencies separated by an oblique or a hyphen
 Examples: USD/CHF: US Dollar-Swiss Franc
 GBP/JPY: Great Britain Pound-Japanese Yen
 Cross Rates

 Suppose that SDM(0) = .50

 i.e. $1 = 2 DM in the spot market
 and that S¥(0) = 100
 i.e. $1 = ¥100
 What must the DM/¥ cross rate be?
DM $ DM
since   ,
¥ ¥ $
DM $1 DM 2 DM 1
   
¥ ¥100 $1 ¥50
 S DM / ¥ (0)  .02 or DM1  ¥50
QUOTES
 Since banks use telegraphic transfers, mail transfers and demand drafts for
inward/outward foreign exchange remittances, different types of exchange rates
used are:
 TT-buying and selling rate- banks transfer funds from one country to another by telex
instructions. Now banks are using SWIFt for international fund transfers.
 Bill buying and selling rate
 Currency buying and selling rate
 Traveller’s cheque buying and selling rate

 The authorised dealers have to apply the relevant rate depending on the nature
of transactions.
 India follows a system of exchange rates wherein the value of rupee was
determined with reference to the daily exchange rate movements of a selected
no. of countries who are India’s major trading partners also known a basket of
currencies.
 RBI maintains the rupee value of the basket currencies within a band.
 The actual composition of the basket has not been disclosed to discourage
speculation.
Different types of rates
 TT-selling rate: this is used for
 outward remittance in foreign currency
 Cancellation of purchase for example bill
purchased earlier is returned unpaid
 A forward purchase contract cancelled
 Import documents received directly by the
importer
 Bill selling rate: used for
 For transfer of proceeds of import bills.
Different types of rates
 TT-buying rate-whenever NOSTRO account has been
credited
 For clean inward remittances
 Conversion of proceeds of instruments sent on collection
basis
 Cancellation of earlier outward remittance: TT, MT or DD
etc.
 Cancellation of forward sale contract

 Bill –buying rates

 For purchase/discounting/negotiation of export bills. The
transit period is 15 days. The processing of export bills is
fixed at 0.25% in India by FEDAI
PREMIUM OR DISCOUNT
 If foreign currency is trading at a forward
premium, the points are added to the spot price
and if foreign currency is trading at a forward
discount, the points are subtracted from the spot
price in case of direct quotes.
 Forward rates are quoted in terms of the
premium or discount to be added to the spot
rate which is quoted in two numbers, the bid
price and ask price.
Determinants of Exchange
Rates
 Short term factors
 Trade
 Stock exchange
 Banking
 Long-term factors
 Currency and credit conditions
 Political and Industrial conditions
 Trade factors- the demand and supply of a foreign currency due to
exports and imports.
 Stock-exchange factors- This is due to the affect of granting of
loans, repayment of loans, receipt of interest, payment of interest
purchases and sales of foreign securities etc.
 Banking- Due to activities of the bank, such as purchase or sales of
banker’s draft, traveller’s letters of credit, arbitrage operation,
changes in bank rate.
Role of Banks in For-ex
transactions:
 Settlement of debts between traders both at home and
abroad for the goods they buy and sell.
 Providers of credit-The banks finance the importers through
Letter of Credit and exporters through Pre-shipment and
Post-shipment finance
 Act as major source of information on overseas trade through
regular bulletins and special reports.
 The dealing happens in a dealing room comprising of front
office, mid office and bank office.
 Market making banks trade among themselves in the form of
swaps which involve both spot and forward contracts. In
forex trading, 2/3 of the transactions are spot, 1/3 swap and
only around 2% outright forwards.
Forex dealing room operations
 Dealing room is the nodal point for all forex activity
of a bank.
 The front office of the dealing room has an inter-
bank and a corporate desk.
 The mid office deals with administration of the risk
management policy of the bank.
 The bank office is responsible for a follow-up of
every transaction enters into by the bank till
settlement happens.
 The dealing room is connected through electronic
network and the rate quotation is always available on
the screen meant for trading currencies.
TRADE FINANCE
 Banks extend trade finance products through
their selected branches, designated as
‘foreign exchange’ specialised branches.
 Trade finance functions include:
 Financing the importers
 Financing the exporters
 Pre-shipment finance
 Post-shipment finance
Financing importers through
letter of credit
 A letter of credit is a commitment on the part of the
bank to place an agreed sum at the seller’s disposal
on behalf of the buyer under precisely defined
conditions. He seller is assured of getting payment
after he presents the documents as per LC terms to
the negotiating bank.
 LCs are also known a documentary credit
 The are governed by provisions of Uniform Customs
ands Practices for Documentary Credits (UCPDC)
framed by ICC, Paris.
 LCs can be revocable, irrevocable. Revolving,
transferable, etc.
DIAGRAMATIC EXPLANATION OF VARIOUS STEPS IN THE OPERATION OF A L/C

1 CONTRACT
IMPORTER EXPORTER
BUYER 5 SELLER
SHIP
APPLICANT BENEFICIARY
GOODS
11
TAKE 6
2 DELIVERY
OF
GOODS NEGOTIATION PREPARE
OF EXPORT & PASS ADVISE
RELEASE
DOCUMENTS BILLS DOCUMENTS L/C
APPLY
AGAINST
L/C
CASH OR
T/R
MAKE 7 4
10 PAYMENT
9
ADVISING BANK /
SEND 8 CONFIRMING BANK
ISSUING OR
DOCUMENTS
BANK NEGOTIATING
3
BANK
L/C
Parties involved in LC
 Applicant (buyer)
 Issuing bank or opening bank
 Benefiaciary (Exporters)
 Advising bank
 Confirming bank
 Reimbursing bank
Steps depicting a typical inport
transaction with letter of
credit
 Step1- The importer signs a purchase contract for buying
certain goods
 Step2- the importer requests his bank to open an LC in favour
of the exporter
 Step3-the importer’s bank opens an LC as per the application
 Step 4-The opening bank will forward the origial LC to the
advising bank in the exporter’s country
 Step 5- The advising bank forwards the same to the exporter
 Step 6-The exporter scrutinizes the LC to ensure that it
conforms to the terms of the contract
 Step 7-In case any terms are not as agreed, the importer will be
asked to make the required amendments to the LC
 Step8- if the LC is as required, the exporter proceeds to make
arrangements of the goods
Steps depicting a typical import
transaction with letter of credit
 Step 9- the exporter will effect the shipment of goods
 Step10- the exporter will prepare export documents and submit to his
bank.
 Step11-the exporter’s bank (negotiating bank) verifies all the
documents with the LC
 Step12-the bank negotiates the bill idf all terms are met.
 Step13-the exporter receives the payment in his bank account if he
wants post-shipment finance
 Step 14-The LC issuing bank receives the bill and documents from the
exporter’s bank
 Step 15-the importer accepts the bill and gets the shipping documents
covering the goods purchased by him
 Step 16 -the LC issuing bank reimburses the amount to the negotiating
bank if the documents are in order.
 Step 17 -Exporter receives the payment upon realisation, if he has not
availed post-shipment finance.
LETTER OF CREDIT
Pre-shipment Finance to
exporter
 Features
 It can be availed in rupee or in foreign currency.
 Banks extend packing credit to exporters on production of either a
LC or a confirmed order
 It is also granted as advance against incentives receivable from the
govt., advance against duty drawback and advance against
checks/drafts received as an advance payment.
 It is also given as a running account facility to exporter with good
track record, provided exporters produce LC within a reasonable
time.
 The period of loan is normally upto 180 days.
 The rate of interest is concessional.
 Banks can avail refinance against packing credit from RBI.
 Packing credit is available for both cash exports and deemed
exports
Post-shipment finance to
exporter
 This is a loan or advance to an exporter from the date of extending the credit
after the shipment of goods to the date of realization of export proceeds. This is
extended against shipping documents.

 1. Exporter makes shipment.



 2. Exporter presents export documents eg. Bill of lading/airway bill, invoice, bills
of exchange, insurance policy, certificate of origin, inspection certificate, packing
list.


 3. Bank verifies the documents.



 4. Bank negotiates the bill (if against LC) or purchases bills or discounts bill (if
w/o LC).
 5. Bill is drawn in foreign currency.
 6.
 Bank credits the exporter’s account in rupees.
 FCNR Loan
 Features
 Tenure is from 6 months to 3 years
 It can be used for import of capital goods/raw
material.
 Loans will be in foreign currency.
 Banks are free to decide its interest rates.
 The interest rates are lower.
 There is no maximum ceiling on foreign
currency loans.
 Customer can repay loans before due date by
paying a nominal penalty.
Exchange earner’s foreign
currency account
 (EEFC) is a non-interest bearing current account account maintained in foreign currency
with an Authorised Dealer by resident persons, i.e a bank dealing in foreign exchange.
 Permissible credits:
 i) Inward remittance through normal banking channel, other than remittances received on account of
foreign currency loan or investment received from abroad or received for meeting specific obligations
by the account holder.
 ii )Payments received in foreign exchange by a 100 per cent Export Oriented Unit or a unit in (a)
Export Processing Zone or (b) Software Technology Park or (c) Electronic Hardware Technology Park
for supply of goods to similar such unit or to a unit in Domestic Tariff Area.
 iii) Payments received in foreign exchange by a unit in Domestic tariff Area for supply of goods to a
unit in Special Economic Zone (SEZ);
 iv) Payment received by an exporter from an account maintained with an authorised dealer for the
purpose of counter trade. (Counter trade is an arrangement involving adjustment of value of goods
imported into India against value of goods exported from India in terms of Reserve Bank guidelines);
 v) Advance remittance received by an exporter towards export of goods or services;
 vi) Payment received for export of goods and services from India, out of funds representing
repayment of State Credit in U.S. dollar held in the account of Bank for Foreign Economic Affairs,
Moscow, with an authorised dealer in India,
 vii) Professional earnings including directors fees, consultancy fees, lecture fees, honorarium and
similar other earnings received by a professional by rendering services in his individual capacity.
 viii) Interest earned, if any, on the funds held in the account;
 ix) Re-credit of unutilised foreign currency earlier withdrawn from the account;
 x) Amount representing repayment by the account holder's importer customer, of loan/advances
granted, by the exporter holding such account.
EEFC account
 Permissible debits:
 i) Payment outside India towards a permissible current account
transaction [in accordance to the provisions of the Foreign Exchange
Management (Current Account Transactions) Rules, 2000] and
permissible capital account transaction [in accordance to the Foreign
Exchange Management (Permissible Capital Account Transactions)
Regulations, 2000].
 ii) Payment in foreign exchange towards cost of goods purchased from
a 100 percent Export Oriented Unit or a Unit in (a) Export Processing
Zone or (b) Software Technology Park or (c) Electronic Hardware
Technology Park and payment of customs duty in accordance with the
provisions of the Foreign Trade Policy of Central Government for the
time being in force.
 iii) Trade related loans/advances, by an exporter holding such account
to his importer customer outside India, subject to compliance with the
Foreign Exchange Management (Borrowing and Lending in Foreign
Exchange) Regulations, 2000.
 iv) Payment in foreign exchange to a person resident in India for
supply of goods/services including payments for airfare and hotel
expenditure.
Exchange Risk
 Exporter-Importer creditworthiness risk
 Credibility and creditworthiness risk of countries.
 Changes in Interest rate risk
 Speculation
 Economic Policy and Political policy changes
 Risk of war or epidemics, or riots or any untoward events.

Note-India has adopted full convertibility on trade account in March

1993. This means that exporters can sell their earnings at free
market rates to banks and the importers can buy the same from
banks at the prevailing market rates from time to time.
Risk management by market
makers(Banks)
 Swap forward to spot (agreement between two
parties to exchange sets of cash flows over a period
in future). Two basic swaps are currency swap and
interest-rate swap.
 Swap forward of one maturity to another maturity
 Swap one currency against another of same maturity
or a different maturity.
 Buy spot for future liability
 Buy strong and sell weak currency
 Buy forward of one maturity against sale of another
maturity or of another currency and a host of other
techniques.
 Currency Swaps
 Spot- Forward Swap transaction
 Swap transaction between currencies A and B consists of a
spot purchase (sale) of A coupled with a forward sale
(purchase) of A both against B. Thus, suppose a bank buys
pounds one month forward against dollars from a customer,
it has created a long position in pounds (short in dollars)
one-month forward. If it wants to square this in the inter-
bank market it will do it as follows: A swap in which it buys
pounds spot and sells one month forward, thus creating an
offsetting short pound position one month forward.

 The rate applicable to the forward leg of the swap will differ
from that applicable to the spot leg. The difference between
the two is the swap margin, which corresponds to the
forward premium or discount. It is stated as a pair of swaps
points to be added to or subtracted from the spot rate to
arrive at the implied outright forward rate.
 In the inter-bank market forwards are done in the form of
swaps
Forward - Forward Swaps
Purchase (sale) of currency A 3-months forward and simultaneous sale
(purchase) of currency A 6-months forward, both against currency B.
Such a transaction is called a forward-forward Swap. It can be looked
upon:
 as a combination of two spot forward swaps:
 1. Sell A spot and buy 3-months forward against B.
 2. Buy A spot and sell 6-months forward against B
 Currency Future Contract
 A futures contract is a standardized agreement that calls for delivery of a
currency at some specified future date, either the third Wednesday of
March, June, September, or December. Currency fuures exist for major
currencies like the Australian dollar, the Canadian dollar, the British pound,
and the Swiss franc, and the yen .
 Contracts are traded on an exchange, and the clearinghouse of the
exchange interposes itself between the buyer and the seller.
 Currency Options Contract
 Currency options, enable the hedging of "one-sided" risk. Only adverse
currency movements are hedged, either with a call option to buy the
foreign currency or with a put option to sell it.
Interest Futures
 Many exchanges around the world such as IMM, LIFFE, DTB, MATIF,
SIMEX and so on trade, futures on short term and long-term interest
rates and debt instruments. Banks, use interest rate futures and
financial institutions to hedge interest rate risk
 A banker who expects some surplus cash in the near future to be
invested in short-term instruments may use the same as insurance
against a fall in interest rates.
 A fixed income fund manager might use bond futures to protect the
value of her fund against interest rate fluctuations. Speculators bet on
interest rate movements or changes in the term structure in the hope
of generating profits.

 Fixed to Floating Interest rate swap and vice versa

 A market maker would quote a bid and in offer swap rate as we have seen
above. The spread is the market maker's compensation). The value of the
swap as of today is zero.
Interest rate swap
 It is an arrangement where one party
exchange one set of interest-rate payments
for another
 A standard fixed-to-floating interest rate swap,
known in the market jargon as a plain vanilla
coupon swap is an agreement between two
parties, in which each contracts to make
payments to the other on particular dates in the
future till a specified termination date. One party,
known as the fixed ratepayer, makes fixed
payments all of which are determined at the
outset.
 The other party known as the floating ratepayer
will make payments the size of which depends
upon the future evolution of a specified interest
rate index (such as the 6-month LIBOR).
Exchange Controls in India
 Due to inadequate forex resources, GoI levies exchange control to
prioritise forex.
 Exchange control was imposed in 1930 under the Defence of India
rules
 Foreign ex control act was set up in 1947 for restrictions on dealing in
forex, on import/export of currency/bullion and regulation of payment
for goods exported.
 The act was replaced in 1957 and directorate of enforcement was set
up.
 The act was again revised in 1974
 The forex regulation act came into force in January 1974.
 Forex regulation act,1973 was replaced by Forex management act in
June, 2000.
 The FEMA provides powers to the RBI for classes of permissible capital
acct transactions and its limits
FEMA-1999
 The objective of the act is to reduce volatility, prevent speculation,maintain
adequate reserves and develop an orderly forex market.
 EEFC acct and RFC account holders are freely permitted to use the funds held in
these acciunts for payment of all permissible current account transactions
 Remittances for the foll. Transactions are prohibited- lotteries, banned
magazines, ffotball pools etc.
 Some transactions requires prior approval form the central government.
 Persons resident in India, earlier resident abroad could hold, own or transfer any
foreign security or immovable property situated abroad.
 Indian cos. Engaged in certain specified sectors can acquire shares of foreign
cos. Abroad if they are engaed in similar activities by share swap or exchange
through the issuance of ADRs/GDRs upto certain specified limits.
 FEMA does not apply to Indian citizens resident outside India.
 All forex transactions are done at market determined rates of exchange.
 Banks are allowed to buy cross currency options from abroad and sell them to
other banks in India.
 Ads do not have to take prior approval form from RBI for business
travel/overseas conferences/study tours/mediacal treatment/chech-ups/training.
Restrictions on Foreign Exchange
(as per FEMA 1999)
 Exchange available for business trip-up to USD 25,000 for a business trip to any
country other than Nepal and Bhutan(RBI permission not necessary) Visits in
connection with attending of an international conference, seminar, specialised
training, study tour, apprentice training, etc., are treated as business visits.
 upto USD 100,000 or its equivalent to resident Indians for medical treatment
abroad on self declaration basis of essential details, without insisting on any
estimate from a hospital/doctor in India/abroad.
 For studies outside India -USD 100,000 per academic year or the estimate received
from the institution abroad, whichever is higher.
 For tourism purposes- foreign exchange up to USD10,000, in any one financial
year may be obtained from an authorised dealer on a self-declaration basis.
 For person going abroad for employment- foreign exchange up-to USD100,000 on
emigration can draw foreign exchange upto USD100,000 on self- declaration basis
 Travellers and students are allowed to purchase foreign currency notes/coins only
up to USD 2000. Balance amount can be taken in the form of travellers cheque or
banker’s draft .
 Resident individuals may remit up to USD 200,000 per financial year through any
AD, for any permitted capital and current account transactions uner Liberalised
Remittance facility. It is mandatory to have PAN number to make remittances under
the Scheme
Permissible transactions in
capital account
 Classes of capital account transactions of
Persons resident in India

 Investment by a person resident in India in foreign securities

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

 Investment in India by a person resident outside India, that is to say,

i.)issue of security by a body corporate or an entity in India and investment therein by a
person resident outsideIndia; and
ii.)investment by way of contribution by a person resident outside India to the capital of a
firm or a proprietorship concern or an association of persons in India.
 Acquisition and transfer of immovable property in India by a person resident
outside India.
 Guarantee by a person resident outside India in favour of, or on behalf of, a
person resident in India.
 Import and export of currency/currency notes into/from India by a person
resident outside India.
 Deposits between a person resident in India and a person resident outside India.
 Foreign currency accounts in India of a person resident outside India.
 Remittance outside India of capital assets in India of a person resident outside
India.
Settlements of transactions in
international foreign markets-
Key systems
Settlements of transactions in
international foreign markets-
Key systems

 SWIFT: society for worldwide interbank financial

telecommunications
 It transmits financial messages, payment orders, foreign
exchange confirmations, and securities deliveries to over
3500 financial institutions on the network, which are located
in 88 countries
 The messages include a wide range of banking and
securities transactions, including payment orders, foreign
exchange transactions, and securities deliveries. In 1992,
the system handled about 1.6 million messages per business
day. Real time and online, SWIFT messages pass through
the system instantaneously.
 FED WIRE and CHIPS:
 FED WIRE, the Federal Reserve's Fund Transfer
System, is a real-time gross settlement transfer
system for domestic funds, operated by the
Federal Reserve. Deposit-taking institutions that
keep reserves or a clearing account at the Federal
Reserve use FEDWIRE to send or receive
payments, which amounts to about II 000 users
 CHIPS are an online electronic payments system
for the transmission and processing of
international dollars. It is operated by NYSE.
CHAPS AND BOE
 CHAPS-clearing house Automated Payments system
 There are 14 CHAPS settlement banks, including the banks of
England, along with 400 other financial firms, which, as sub –
member, can engage in direct CHAP settlements
 CHAPS is for high value same-day sterling transfers.

 Bills of exchange is one of the chief means of settlement in

trade. It helps the exporter to obtain cash as soon as
dispatch of goods is made. The exporter draws a bill on the
importer or on the importer’s bank and attaches the
shipping documents (invoice, insurance policy and bill of
lading) and sells it to local bankers who pay the exporter
after sending the documents to their banking
correspondents in the importer’s country. Bill can be
payable on demand or payable on acceptance.
Asian Clearing Union
 The Asian Clearing Union (ACU) was established with its head quarters
at Tehran, Iran on December 9, 1974 at the initiative of the United
Nations Economic and Social Commission for Asia and Pacific (ESCAP),
as a step towards securing regional co-operation. The ACU is a system
for clearing payments among the member countries on a multilateral
basis.
 Iran, India, Bangladesh, Bhutan, Nepal, Pakistan, Sri Lanka and
Myanmar are the members of the ACU.
 All authorised dealers in India have been permitted to handle ACU
transactions
 The Asian Monetary Unit is the common unit of account of ACU and is
equivalent in value to one U.S. dollar by opening ACU dollar
accounts,without approval of RBI.
 Payments which are not on account of current international
transactions as defined by the International Monetary Fund are not
allowed to be traded by ACU.
Method of settlement in ACU
transactions
 i.Reserve Bank of India undertakes to receive and pay U.S. dollars from/to
authorised dealer for the purpose of funding or for repatriating the excess
liquidity in the ACU dollar accounts maintained by the authorised dealer with
their correspondents in the other participating countries. Similarly, the
Reserve Bank of India has also been receiving and delivering U.S. dollar
amounts for absorbing liquidity or for funding the ACU dollar (vostro)
accounts maintained by the authorised dealers on behalf of their overseas
correspondents.

 ii. Funding of an ACU dollar account maintained with a correspondent bank in

another ACU participant country will continue to be effected by Reserve Bank
only after receiving an intimation that equivalent amount of U.S. dollar is
being credited to its account with the Federal Reserve Bank of New York,
New York, by the authorised dealer bank on the value date. Similarly,
Reserve Bank will continue to arrange for payment of US dollar from its
account with the Federal Reserve Bank of New York to the account of the
correspondent of the authorised dealer in New York, in case it has received
intimation of surrender of surplus funds to the other participant central bank
on behalf of the authorised dealer bank in India.
Types of ACU Transactions
 a. from a resident in the territory of one participant
to a resident in the territory of another participant
 b. for current international transactions as defined by
the Articles of Agreement of the International
Monetary Fund
 c. permitted by the country in which the payer
resides
 d. payments which are in compliance with FEMA
1999, rules, regulations, orders or directions.
 e. for export/import transactions between ACU
member countries on deferred payment terms.
UNIT IV- INTERNATIONAL
BANKING
 Definition -
 A bank may be said to be international if it uses branches or subsidiaries in
foreign countries to conduct business. For example, the sales of U.S dollar
denominated deposits in Toronto by American banks with Canadian subsidiaries
would constitute international banking; the sale of the same deposits by
Canadian banks would be classified as domestic banking.
 A second definition of international banking relates to the location of the
bank. Any sterling transaction undertaken by a bank headquartered in the UK
would be part of British domestic banking, irrespective of whether this
transaction is carried out in a British Branch or a subsidiary located outside the
U.K. but transactions in currencies other than sterling will be part of international
banking independent of the actual location of the British branch.
 A third way of defining international banking is by the nationality of the
customer and the bank If, the headquarters of the bank and customer have
the same national identity, then any banking operation done for this customer is
a domestic activity, independent of the location of the branch or the currency
denomination of the transaction. For example, all Japanese banking carried out
on behalf-of Japanese corporate customers would be part of the domestic
banking system in Japan, even if both the branch and the firm are subsidiaries
located in Wales.
FEATURES
 They deal in euro-deposits which are currency
deposits made in a bank outside the jurisdiction
of the Central Bank which issued the currency.
 Their assets are euro-loans which are large
loans sought by big borrowers like government
like government and multinational firms.
 Their liabilities include euro deposits and
certificate of deposits.
 During their business, they face exchange rate
risks, Interest rate risks, and default risks.
 To diversify risk, they use loan syndication and
consortiums.
Functions
 They serve customers having foreign operations like handling of
collections and payments for domestic clients, engaged in foreign
trade. This fee has become an important component of their
earnings.
 They receive deposits in various currencies called euro deposits in
the form of euro dollar CDs, Euro-notes, Floating rate notes,
floating rate CDs etc.
 IBs make loans in different currencies.
 They convert euro deposits into euro loans as loans can be given
against euro deposits.
 They collect market information which affects the profitability of
corporates to whom banks have lent.
 They collect information on borrowers (also by street-talk).
 They also provide custodial services by possessing securities,
collecting dividend on offer coupons, handling stock splits, rights
issue, tax-reclamation etc.
FORMS OF ORGANIZATIONAL
STRUCTURES OF
INTERNATIONAL BANKS
 Correspondent Banking-banks in different countries in
which other banks have correspondent accounts.
 Overseas Offices- not authorized to perform banking
transactions, they evaluate credit worthiness of local customers
and bank’s clients for loans.
 Bank Agency-arrange loans, clear drafts & cheques,
channelizes foreign funds into financial markets.
 Foreign Branches-branches set up by domestic banks
 Foreign subsidiaries and affiliates-locally
incorporated banks owned wholly or partly by parent bank.
 Consortium banks -set up by different banks to arrange large
loans and underwrite stocks and bonds, for lending to corpns & govts.
LIABILITIES OF
INTERNATIONAL BANKS
 Term Deposits
 Certificate of Deposits
 Floating Rate Notes (LINKED TO
libor)
OPERATIONS OF INT. BANKS
 The international banking services in India is provided for the
benefit of Indian customers, corporates, NRIs, Overseas
Corporate Bodies, Foreign Companies/ Individuals as well as
Foreign Banks etc.
 Products
 1. NRI Banking
 2. Foreign Currency Loans
 3. Finance/Services to Exporters
 4. Finance/Services to Importers
 5. Remittances
 6. Forex & Treasury Services
 7. Resident Foreign Currency (Domestic) Deposits
 8. Correspondent Banking Services
 9. All General Banking Services
INTER-BANKING
 It enables banks to manage their assets and liabilities, at the
margin to meet daily fluctuations in liquidity requirements,
thereby enhancing liquidity smoothing.
 Global liquidity distribution also takes place, because the market
can be used to redistribute funds from excess liquidity regions
to areas of liquidity shortage.
 The market also means deposits initially placed with certain
banks can be on lent to different banks, thereby facilitating the
international distribution of capital.
 The hedging of risks by banks is made easier, because they can
use the inter-bank markets to hedge their exposure in foreign
currencies and foreign interest rates,
 Regulatory avoidance is the fifth function of the inter-bank
market-bank costs are reduced if they can escape domestic
regulation and taxation.
LEGAL AND REGULATATORY
ASPECTS OF INT. BANKS
 International Banking Act, 1978 allows foreign banks to :
 open accounts and accept deposits directly related to international transactions.
 establish subsidiaries for doing business abroad.
 hold stock in subsidiaries overseas, borrow and lend funds.
 accept deposits, loans, exchange currencies, sell govt. and corporate securities, invest
in stock etc.
 Under subsection (2) of Section 11, Banking Companies incorporated
outside India (Foreign banks operating in India) have to deposit and keep
deposited with the Reserve Bank, an amount of 15 lakh of rupees, and if it
has a place of business in Mumbai or Kolkata or both, 20 lakh of rupees in
cash/unencumbered securities.
 20% of the profit for each year in respect of the Business transacted through the
branches in India as disclosed in the profit and loss account has to be deposited with
the Reserve Bank.
 On the ceasing of business by any foreign bank for any reason, these deposits shall
form the assets of the company on which the creditors in India shall have a first
charge
CONTROL ON BANKS IN INDIA
REGARDING FOREX TRANSACTIONS
 Banks are not permitted to deal in arbitrage activity in forex exchange.
 Forward sale contract against export of services (eg. technical know-
how, computer software) may be booked provided the amt does not
exceed the contracted value of the services and the period is not over
7 days.
 A forward sale contract against import of merchandise can be booked if
the goods are under OGL or the importer has a valid import license.
 For releasing forex for foreign travel, the release should not be earlier
than a fortnight before the date of commencement of the journey.
 Sale of forex notes and coins should be only against RBI permit.
 Banks can give guarantee to exporter on behalf of the importer.
 A guarantee for the import or export of high priced machinery, heavy
electrical plant, ships, etc. on deferred payment terms may be
furnished only with prior approval of RBI and the total guarantees
should not exceed 15% of its total outstanding loan and advance.
Genesis of Basel Accords
BASEL II
 Non-binding agreement
 Developed since 1999
 Sets the standard for prudential regulation
among the G-10 countries,
 Regulatory bodies committed to change any
necessary banking laws and regulatory
practices in order to abide by the standards
and guidelines and statements of best
practice.
BASEL II
BASEL II
 Basel II comprises three mutually re-
enforcing pillars:
 o Pillar 1 capital adequacy
 o Pillar 2 supervisory disclosure
 o Pillar 3 market discipline
 Foreign Bank Supervision Enhancement
act (FPSEB) 1991
 Bank of international Settlement
 Regulating International
Banking
 Basel Committee
 It is a group of central bank heads from 11
industrialized countries.
 It enhances regulatory cooperation in the
international area.
 Its 1975 Concordat allocated national responsibility
for monitoring banking institutions and provided
for information exchange.
Overseas Operations of Indian
Banks having branches abroad
 Banks provide support to and service India's foreign
trade, apart from lending to Indian ethnic
community.
 The branches of Indian banks abroad have been
doing predominantly traditional business such as
trade financing, negotiations/collection of bills,
remittances, etc. emanating mainly from the ethnic
clientele overseas.
 New activities such as project financing, real estate
finance, industrial loans, participation in syndicated
exposures, sovereign loans, etc, were later taken up.
Overseas Operations of Indian
Banks having branches abroad
 Until 1994, different departments in Reserve Bank of
India were exercising supervision over banks, non-
banking financial companies and financial institutions.
 To keep a close watch on financial markets and avoid
recurrence of crisis in the financial system, the Board
for Financial Supervision was set up under the aegis
Reserve Bank under Reserve Bank of India (Board for
Financial Supervision) Regulations, 1994 with the
objective of paying undivided attention to the
supervision of the institutions in the financial sector.
Overseas Operations of Indian
Banks having branches abroad
 The Indian banks conducting overseas operations
report the assets and liabilities, problem credits,
maturity mismatches, large exposures, currency
position on quarterly basis and country exposure,
operating results etc. on an annual basis. The
reporting system has been reviewed and rationalised
in 1999 in consultation with the banks and the
revised system put in place in June 2000. The revised
off-site returns focus on information relating to
quality and performance of overseas investment and
credit portfolio, implementation of risk management
processes, earning trends, and viability of the
branches.
A.Funded Assets
B. Non-funded Assets
Other regulations:
Maintenance of CRAR
 After assessing the capital funds and the risk weighted assets, the bank
will have to compute the ratio of the capital to risk weighted assets.
The minimum CRAR was initially set at 8 percent. However, to meet
the international standards, this is being raised to 9 percent with effect
from March 31, 2000.
 Reporting Banks should furnish an annual return commencing form the
year ended March 30, 1992, indicating:
 a. Capital funds
 b. Conversion of off-balance sheet/non-funded exposures
 c. Calculation of risk weighted assets and
 d. Calculation of capital funds ratio.
 The format for the returns is given as a break-up and aggregate in
respect of domestic and overseas operation will have to be furnished.
The returns should be signed by two official who are authorized to sign
the statutory returns submitted to the RBI.
INTERNATIONAL CORPORATE FINANCE
 Corporates deal in the foreign Exchange Market in the following ways:

 Product Markets (Exports-imports)

 Subsidiaries (Dividend remittance & fin)
 International Financial Markets (Investing & financing)
 Corporate firms deal in international corporate finance in the following ways:

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

 Investment advice and assistance to customers and other

banks.
 Protecting/hedging bank’s capital against bank’s capital

exposure to a particular currency or interest rates or

commodity prices.
 Buying and selling securities/options.

 Speculate on short term interest rate movements. When the

treasury expects interest rates to rise(bond prices fall), it

goes ‘short’ (sells securities) and when it expects interest to
fall it goes ‘long’(Buys securities).
Global Best Practices in Risk and Treasury Management
A comprehensive framework – 9 part framework
Global Best Practices in Risk and Treasury Management
Integrated, not Fragmented Approach
(Asset, Liability, Off-Balance Sheet Items)
 Global Treasury Services
 All India collection, coverage over 4500 locations
Receivables  Direct debit, tracking, MIS and lock-box arrangement
Management
 Electronic payments (ECS (Dr)/ NEFT/ RTGS) and Auto-Recon through ERP integration

 Outsourcing of bulk payments processing

Payment
 Secure environment for processing payments
Solutions
 Zero balance Accounts and transmission of adhoc payment instructions

 Corporate - Inventory Finance (pre-shipment) and Receivables Finance (post-shipment)

Trade Solutions  Structured - Buyer’s Credit / Supplier’s Credit Buyer Supported Vendor Financing
 Electronic Interface – Trade Direct ( download advices, establish LCs, authorize payments
online)
 Bank Fixed Deposits
Liquidity
Management  Government Securities / Treasury Bills, Corporate Commercial Paper / Bonds
Solutions  Inter Company Loans and Short term (liquid) Mutual Funds

 Electronic File Delivery (EFD) facilitates Bulk Payments – Corporate Checks, NEFT and
Electronic
RTGS
Interfaces &
Integration  BA Direct, Strategic Global Information Reporting (SGIR) facilitates online account
information, enquiry and reporting
Cash Management Service
 An innovative service specifically tailored to
meet the requirements of
Corporates/Business houses/Partnership firms
 Speedy collection of outstation cheques and
other instruments
 Pooling of funds at designated centres
 More importantly, providing funds to the
Corporates as per their need
 Customised MIS reports
Benefits to the Corporates

 Funds available as per need on day zero, day

one, day two, day three etc.
 Corporates can plan their cash flows
 Bank interest saved as instruments are
collected faster
 Affordable and competitive rates
 MIS reports customised to meet individual
Corporate's requirement
 Single point enquiry for all queries
 Pooling of funds at desired locations
Benefits of Cash Management Services:
 Financial Benefits
 Operational Benefits
 Control Benefits
 Collection Services     
  Local Cheque Collections.
 Upcountry Cheque Collections.
 Cash Collections.
 Collections through ECS/RTGS/NEFT.
 Payment Services      
 •Anywhere Banking.
• Issue of bulk DD/POs.
•Cheque Writing.
• Interest and Dividend Warrants.
Payments through ECS/RTGS/NEFT
RISK MANAGEMENT
 Banks advise and conclude transactions on Exchange
and Interest Rate Derivatives for their clients by
using derivatives eg. Single currency interest rate
swaps.
 Portfolio Risk Management
Portfolio Monitoring
Risk Modeling (Interest Rate Risk and Credit Risk
Modeling)
Actual-to-Expected Analyses
Mining of Risk Drivers
Underwriting Effectiveness Study
WEALTH MANAGEMENT
SERVICES
 Banks these days provide Optimal asset allocation among a
wide range of investment products to create a portfolio best
suited to the customer’s requirements and preferences, while
maintaining the best balance between risk and return.
 The provide investment advisory service as well as investment
on the customer’s behalf in Fixed income products, real estate
and insurance products, mutual funds, equity and IPOs.
 Banks have bancassurance partnerships with insurance
companies so that customers can avail of the services of
trained & certified professional consultants.
 Under this service, customers can receive real time information
on the market movements, which includes commentary,
commencing from the opening of the markets till the close of
the day. The periodic commentary on the market would be at
the time of opening, forenoon and closing.
