PROJECT REPORT

ON

EVOLUTION IN BANKING SERVICES & FOREIGN EXCHANGE AT BRANCH LEVEL (RETAIL BANKING)

AT

AXIS BANK LTD.

VASANT VIHAR NEW DELHI

Submitted By:
JYOTI LOHARIA Master of Business Administration -II SEM 2009-2011 Institute of Business Management and Research, IPS ACADEMY, INDORE 1

ACKNOWLEDGEMENT

It is a matter of great satisfaction and pleasure to present this report on EVOLUTON OF BANKING SERVICES & FOREX MANAGEMENT AT BRANCH LEVEL taking Axis bank as basis. I take this opportunity to owe my thanks to all those involved in my training. This project report could not have been completed without the encouragement of Mrs. MEENA BAKSHI (MANAGER-VASANT VIHAR BRANCH), Mr. AJAY DARNAL (MANANGER-OPERATIONS) and Mr. BRIJESH ARORA (MANAGER- BUSINESS BANKING). Their timely help & guidance helped me to complete this project successfully. I thank Mr. SURESH MEHRA (ASST. VICE PRESIDENT- HR) for giving me opportunity to work at AXIS BANK, as a FINANCE TRAINEE. I am thankful to Mrs. GEETA SACHDEVA (MANAGER-FOREX DEPT.) and Ms. SAMMY (ASSISTANT MANAGER-FOREX DEPT.) for their encouragement and guidance at every stage of my training work. I express my gratitude towards the entire staff of AXIS BANK, VASANT VIHAR, those who have helped me directly or indirectly in completing the training.

EXECUTIVE SUMMARY

This project was aimed at understanding two thingsTo know how the services offered by banks have changed over the years and what are the new services that have emerged and changed the whole face of banks To understand the working of forex department in retail banking at branch level

TABLE OF CONTENTS

Acknowledgements Executive Summary 1. Introduction An introduction to Banking in India About AXIS Bank 2. Evolution of Banking Services 3. Forex Meaning and Characteristics 4. Foreign Exchange in India 5. Regulatory Bodies of Forex in India 6. Foreign Exchange at Branch Level 7. Bibliography

2 3

5 10 11 21 22 33 34 37 47

AN INTRODUCTION TO BANKING IN INDIA

Without a sound and effective banking system a nation cannot have a healthy economy. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dialing for a pizza. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.

During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 which brought 80% of the banking segment in India under Government ownership. Third phase introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices. The country is now flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system has become more convenient and swift. Time is given more importance than money. 5

The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure. Currently, banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true.

CURRENT RATE OF BANKS BY RBI Reserve Ratios 1. CRR- Bank in India are required to hold a certain proportion of their deposits in the form of cash. However, actually Banks dont hold these as cash with themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is considered as equivalent to holding cash with them. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks. For example, if the reserve ratio in India is determined by RBI to be 9%, this means all banks must have 9% of their depositors' money on reserve in the bank. So, if a depositor deposits Rs. 100 with the bank, the banks will have to hold additional Rs 9 with RBI and will be able to use only Rs 91 for investments and lending / credit purpose 2. SLR- SLR stands for Statutory Liquidity Ratio. This is the amount of liquid assets, such as cash, precious metals or other short-term securities, that a bank must maintain in its reserves. Thus, we can say that it is ratio of cash and some other approved to liabilities (deposits). It regulates the credit growth in India.

Policy Rates1. Bank Rate- Bank rate, also referred to as the discount rate, is the rate of interest which a central bank charges on the loans and advances that it extends to commercial banks and other financial intermediaries. Changes in the bank rate are often used by central banks to control the money supply. Bank rate is a long-term measure and is governed by the longterm monetary policies of the governing bank concerned.

2. Repo Rate- It is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

3. Reverse Repo Rate- It is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in 7

the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI. OTHER RATES

Prime Lending Rate- Interest rate charged by banks to their largest, most secure and creditworthy (prime) customers on short-term loans is called as PLR. Generally a bank's best customers consist of large corporations. This rate is used as a guide for computing interest rates for other borrowers. The prime rate is also important for retail customers, as the prime rate directly affects the lending rates which are available for mortgage, small business and personal loans.

Base Rate- The Base Rate system has replaced the PLR system with effect from April 1, 2010. Banks now determine their actual lending rates on loans and advances with reference to the Base Rate. Base Rate includes all those elements of the lending rates that are common across all categories of borrowers. While each bank may decide its own Base Rate, some of the criteria that could go into the determination of the Base Rate are: (i) cost of deposits; (ii) adjustment for the negative carry in respect of CRR and SLR; (iii) unallocatable overhead cost for banks such as aggregate employee compensation relating to administrative functions in corporate office, directors and auditors fees, legal and premises expenses, depreciation, cost of printing and stationery, expenses incurred on communication and advertising, IT spending, and cost incurred towards deposit insurance; and (iv) profit margin

LIBOR (London Inter Bank Offered Rate) - An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year. The LIBOR is the world's most widely used benchmark for short-term interest rates. It's important because it is the rate at which the world's most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points.

BREAK-UP OF A Rs. 100 DEPOSITED After complying with all interest rates, banks have very les amount of money present with them. Here we will look how much money a bank has to lend and even after this how is it able to make profit. Suppose a customer deposits Rs. 100 with the bank, now how is it processed further can be explained by the flow chart below-

Rs. 100 deposite d

SLR (25%)

Rs. 75 Left

Priority Sector Lending (40%)

Rs.69 Left

CRR (6%)

Rs. 29 Left

To lend & give interest

ABOUT AXIS BANK

Axis Bank was the first of the new private banks to have begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I), Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) and other four PSU insurance companies, i.e. National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance Company Ltd. The Bank today is capitalized to the extent of Rs. 407.44 crores with the public holding (other than promoters and GDRs) at 54.51%. On the year ended 31 March 2009 the Bank had a total income of Rs 13,745.04 crore (US$ 2.93 billion) and a net profit of Rs. 1,812.93 crore (US$ 386.15 million). The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai. The Bank has a very wide network of more than 1042 branches (including 56 Service Branches/CPCs as on 30th June 2010). The Bank has a network of over 4474 ATMs (as on 30th June 2010) providing 24 hrs a day banking convenience to its customers. This is one of the largest ATM networks in the country. The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence.

VISION 2015: To be the preferred financial solutions provider excelling in customer delivery through insight, empowered employees and smart use of technology Core Values Customer Centricity Ethics Transparency Teamwork Ownership

10

EVOLUTION OF BANKING SERVICES

The project starts with a question with a sincere effort to find the closest possible reason: If bank could only lend ~ 30% of Rs 100 collected from people then what are the ways by which bank is able to sustain profitability?. As banks are a (for) Profit Organization, the answer to this question shall now lead us to the reforms in banking industry The answer comes in a single line in order to sustain profitability bank had started doing CROSS-SELL Business wherein margins of profit are higher than those in its basis products CA-SA. The CASA had earning restrictions because its policies are to a large extend regulated and covered by various monitoring agencies under tight supervision leaving less space for non-compliance. The penalties do the rest (applies only in case of fault) Here in the project, we shall take you through the traditional products & the new products that have emerged. The best way to understand difference between traditional approach & current strategies applied by banks to remain profitable can be understood by a small change the Fee income & the float income concept. Pre1995 saga i.e. the launch of private sector banks in India, banking largely used to be stand alone branches concept with few branches enjoying the facility of CBS (Core Banking Services). Important to note here is that all private banks started in India with interlinked branches from day 1. So, traditionally banks used to earn profit branch wise without any bifurcation as to where the income came from. Now the approach differentiates between money earned by charges non-maintenance, DD/PO Printing, cheque bouncing and the like known as fee income & those earned because of higher commitment of balances by client as float income. This can be best understood by an e.g. of dividend payments cycle (appearing under Cash Management Services). We shall come across it as the article progresses. We shall also be able to learn the fine-tuning mechanism of bank to achieve higher margins and quarter-to-quarter sustainable growth to satisfy the investors and to retain the employee by paying better salaries, perks and awards. Let us begin with traditional bank products along with the new changes in them

11

SAVINGS: A savings account is maintained by individuals and some retail financial institutions. It needs a minimum balance to be maintained and is further characterized by monthly interest received on savings and no overdraft facility. However a debit card is provided to mitigate the overdraft facility which can be used at ATMs for quick withdrawal and transfers. Pass book and bank statements help the customer in knowing all his monthly transactions. NEW CHANGES: (1) Doorstep Banking- Banks offer through own employees and Agents the banking services like pick up of cash, instruments and delivery of cash and demand drafts to Corporate Customers/ Government Departments/ PSUs/ Individual Customers at their doorstep. With increasing competition in the retail arena, doorstep banking is gaining popularity with both the bankers as well as the customers. (2) Mobile/Phone/Net Banking- Using the Internet, you can look-up the status of your account, submit queries and undertake a wide range of transactions. Just by using your mobile phone you can do varied banking transactions and bill payments. It even enables you to access your savings account on your mobile phone. You can check account balances and mini statement, transfer funds, make bill payments and do much more by using your mobile phone. (3) Priority Banking- In this form of banking, the bank identifies its priority customers (often customers with deposits above 1 lakh-however this is different for each individual bank) and some special benefits are provided to these first class customers by the bank. Ex. They do not have to wait in the queue for transactions. They are assigned client relationship managers to take care of all their banking needs. The basic purpose of this form of banking is to make the experience of banking hassle free and less time consuming.

(4) Wealth Management- In wealth management the thrust is on providing first-class customers, customized services and expert advice on various financial needs. Wealth management requires a disciplined process, customized solutions, and, perhaps most important, personalized attention. For wealth management purposes, HNWIs have accrued far more wealth than the average person, and therefore have the means to access a larger variety of conventional and alternative investments.

12

(5) Private Banking Services- Private banking is a term for banking, investment and other financial services provided by banks to private individuals investing sizable assets. The term "private" refers to the customer service being rendered on a more personal basis than in mass-market retail banking, usually via dedicated bank advisers. For private banking services clients pay either based on the number of transactions, the annual portfolio performance or a "flat-fee", usually calculated as a yearly percentage of the total investment amount.

CURRENT ACCOUNT: A current account is a transactional account more popular in use by the business community. It has more services being offered than savings, like an overdraft facility, offset mortgage facility, etc. There is no interest earned and the account aims to facilitate businessmen with availability of funds at all times for meeting any exigencies. NEW CHANGES: 1. Salary account to Employees- Salary Account is a benefit-rich payroll account for Employers and Employees. Organizations opt for Salary Accounts to enable easy disbursements of salaries and enjoy numerous other benefits too. All that is required is an advice (in form of a cheque/debit instruction, ECS, etc) for the total salary amount along with the salary details of the designated employees in a soft and hard copy format and salary is credited to the respective employees' accounts as per the statement of advice.

2. Online Tax Payment- Every Indian income tax assesse who files an income tax return and has a liability to pay taxes can avail of this facility to pay taxes online, if he has a net-banking account with any of the Authorized Banks (authorized by Income Tax Department). The bank will process the transaction online by debiting the bank account indicated by individual and generate a printable acknowledgment indicating the Challan Identification Number (CIN).

3. SME Loans- Banks have traditionally relied on a combination of documentary sources of information, interviews and visits, and the personal knowledge and expertise of managers in assessing and monitoring business loans. However, when assessing comparatively small and straightforward business credit applications banks now largely rely on standardized credit scoring techniques (quantifying such things as the characteristics, assets, and cash flows of businesses/owners). Using such 13

techniques and also centralizing or regionalizing business-banking operations generally significantly reduces processing cost. Standardized computer-based assessment is also more accurate and fairer than reliance on the personal judgments of local bank managers. As a result, banks now offer more loans, faster and in larger amounts, and reduce previously high security requirements. 4. CMS- The objective of a cash management system is to improve revenue, maximize profits, minimize costs and establish efficient management systems to assist and accelerate growth. Products offered by banks under collections (paper and electronic): Local cheque collections. Magnetic ink character recognition (MICR) (three day clearing of cheques). Outstation cheque collections; Also cheques drawn on branch locations. Cheques drawn on correspondent bank locations. Cheques drawn on coordinator locations. House cheque collections. Outside network cheque collections. Cash collections. ECS-Debit. Post dated cheque collections. Invoice collections. Capital market collections. Products offered by banks under payments (paper and electronic): Demand drafts/bankers cheques. Customer cheques. Locally payable. Payable at par. RTGS/NEFT/ECS. Cash disbursement. Payments within bank. Capital market payments. 5. IPO handling via ASBA (application supported by blocked amount) - This new initiative is in the area of IPO payments as proposed by the capital markets regulator, Securities and Exchange Board of India (SEBI). The objective of introducing ASBA is to ensure that the investor's funds leave his bank account only upon allocation of shares in public issues. The ASBA process also ensures that only the requisite amount of funds is debited to the investor's bank account on allotment of shares. In this mechanism, the need for refunds is completely obviated. Using this interface the banks, participating in the IPO process would be able to upload the bids with respect to their customers, into the electronic book of BSE. The interface facilitates not only the controlling branch but also the designated branches of the banks to directly upload the bids into the electronic book at BSE. The ASBA application has been successfully tested with eleven banks. 14

DEMAT SERVICES: The term Demat, refers to a dematerialized account. Access to the Demat account requires an internet password and a transaction password as well as initiating and confirming transfers or purchases of securities. Purchases and sales of securities on the Demat account are automatically made once transactions are executed and completed. Banks offer the Demat account facility for individual Indian citizens to trade in listed stocks or debentures. The Securities Exchange Board of India (SEBI) requires the investor to maintain a Demat account. In a Demat account shares and securities are held in electronic form instead of taking actual possession of certificates. Electronic settlements of trades take place. There are three distinct advantages of having a Demat account with a bank quick processing, accessibility and online transaction. Generally, banks credit your Demat account with shares in case of purchase, or credit your savings accounts with the proceeds of a sale on the third day. Banks are also advantageous because of the number of branches they have. Some banks give the option of opening a Demat account in any branch, while others restrict themselves to a select set of branches. Some private banks also provide online access to the Demat account. So, you can check on your holdings, transactions and status of requests through the net banking facility. CAPITAL MARKET SERVICES: Bank underwrite debt and equity, assist company deals (advisory services, underwriting and advisory fees), and restructure debt into structured finance products. This is one of the new areas in which banks have started dealing. CREDIT CARDS: A credit card is only an automatic way of offering credit to a consumer. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services. The financial institution or other organizations issue the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user. A credit card is method of selling and buying goods without having to deal with cash. You can use credit cards anywhere today from shopping transactions to doing business online.

.FOREX SERVICES: Foreign exchange is simply the exchange of one currency for another, but it can take many forms. Forex is the international financial market used for trade of world currencies. It has been working since 70s of the 20th century - from the moment when the biggest world nations decided to switch from fixed exchange rates to floating ones.

15

Foreign exchange services include:

Currency Exchange - where clients can purchase and sell foreign currency banknotes. Wire transfer - where clients can send funds to international banks abroad. Foreign Currency Banking - banking transactions are done in foreign currency.

GOLD SELLING: Gold continues to be one asset that appreciates steadily. And that is why banks have started selling gold coins and bars in order to maximize its profit. It benefits both the bank and the customer- bank making money and customer getting pure gold at a reasonable price without getting cheated by a broker. MUTUAL FUNDS: A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. It offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. MERCHANT ACQUISITION BUSINESS- EDC SWIPE MACHINE: EDC machines that have replaced the age old zigzag impression machines, gives results in seconds. As soon as we swipe the card in the EDC the transaction is referred to the main server of the bank and the result is displayed at the shops counter in just four to five seconds. During this brief period the credit limit availed, limit available and the authenticity of the card are checked. The signature on the card is to be checked by the shop owner or the acceptor with the signature on the counter foil. Forgery is also minimized with the introduction of photo cards. Companies which provide credit card machine and payment networks call themselves "merchant card providers". Debit cards are also an important component in the retail payment system. Unlike ATM, where generally money flows out of the bank account of the card holder, in case of debit card usage at merchant establishments, the money flows into the bank account of the merchant using an electronic data capture (EDC) machine installed at the merchant location. An EDC machine behaves in the same manner as an ATM machine where you transfer funds from one of your accounts to another.

16

LIFE INSURANCE: Banks are a very productive channel for life insurance because they have a relationship with the consumer. Further, banks reach a market that is typically underserved by life insurance agents, extending the market focus and position. This means that they develop a specific line of products for their customer, with less extensive coverage and a lower price point. GENERAL INSURANCE: General Insurance comprises of insurance of property against fire, burglary etc, personal insurance such as Accident and Health Insurance, and liability insurance which covers legal liabilities. There are also other covers such as Errors and Omissions insurance for professionals, credit insurance etc. NPS [NEW PENSION SCHEME]: Govt. of India has introduced the New Pension System (NPS) for Govt. employees w.e.f January 1, 2004, which covers new entrants to Central Government services (excluding Armed Forces) and some State Government services. With the objective of promoting old age income security among all citizens, Govt. of India has now made NPS available to all citizens of India, other than Govt. employees w.e.f May 1, 2009 on a voluntary basis. Pension Fund Regulatory and Development Authority (PFRDA), the regulator for the NPS, is responsible for registration of various intermediaries in the system such as Central Record Keeping Agency (CRA), Pension Funds, Custodians, NPS Trustee Bank, etc. PFRDA has authorized 22 entities to act as Point of Presence (POP)/ Point of Presence Service Provider (POP-SP) i.e. designated branches of POP, for the purpose of interaction between the voluntary subscriber and the NPS architecture. POP/ POP-SP shall perform the functions relating to providing information on the NPS to citizens, registration of subscribers, undertaking Know Your Customer (KYC) verification, receiving contributions and instructions from subscribers and transmission of the same to designated NPS intermediaries including transfer of contribution money to Trustee Bank. NON-MAINTENANCE CHARGES Banks have now begun to take non-maintenance charges from customers i.e. a fee rather penalty is charged in case the customer is not having enough balance in his account. This is done in saving as well as current account, though the penalty is different for different kinds of account. In case of Axis Bank the minimum balance to be maintained inCurrent a/c: Rs. 10000 (basic) Saving a/c: Rs. 5000 (basic)

17

DEPOSIT A/Cs IN THE NAME OF NON-RESIDENT AND RESIDENT Accounts in the name of Non- Residents a. NRO A/c- (Non-Resident Ordinary Rupee A/c) - At a point of time when a resident becomes an NRI, his existing rupee account is designated as Non-resident Rupee (NRO) account. Such accounts are maintained in the nature of current, saving, recurring or term deposits. NRIs can also open NRO accounts for collecting their funds from local bonafide transactions. Interest earned on NRO account is not exempt from tax. These accounts can be opened in the name of non-resident individuals / entities who have left India for a foreign country for taking up employment or business or vocation for an extended period of time or permanently. Funds in this account are not repatriable and cannot be remitted abroad or transferred to NRE accounts without prior permission of the RBI. However, NRIs/PIO/Foreign Nationals (including retired employees or non-resident widows of Indian citizens) can remit, through the AD, up to US dollar one million per calendar year, out of the balances held by them in NRO account / sale proceeds of assets, for all bonafide purposes.

b. Non-Resident (External) Rupee A/c- The NR (E) RA scheme also known as the NRE scheme was introduced in 1970. Any NRI can open an NRE account with funds remitted to India through a bank abroad. This is a repatriable account and transfer from another NRE account or FCNR (B) account is also permitted. A NRE rupee account may be opened as current, savings or term deposit. Local payments can be freely made from NRE accounts. Since this account is maintained in Rupees, the depositor is exposed to the exchange risk. NRIs / PIOs have the option to credit the current income to their Non-Resident (External) Rupee accounts, provided the authorized dealer is satisfied that the credit represents current income of the nonresident account holders and income-tax thereon has been deducted / provided for.

c. FCNR (B) A/c- The Foreign Currency Non-Resident (FCNR (B)) scheme was introduced in 1994 to replace the prevailing FCNR (A) scheme which was introduced in 1975, where the foreign exchange risk was borne by RBI and subsequently by the Govt. of India. FCNR (B) accounts can be opened as term deposits in any of the designated currencies, which are, US Dollar, Pound Sterling, Japanese Yen and Euro. There is no exchange risk to the depositor since the account is opened in foreign currencies. The interest received is fully exempt from tax. This is also a repatriable account and can be used to make local payments as well as remittances abroad. Interest rates for different maturities and different currencies are fixed by the bank based on the prevailing rate in the international market. Loans and overdrafts to NRIs in India and abroad can be granted against security of NRE/ FCNR (B) deposits without any limits. Repayment of such loans or overdrafts can be made from the proceeds of forex remittances or NRE/ FCNR (B) deposits. 18

Accounts in the name of Residents 1. Resident Foreign Currency A/c- Returning Indians, i.e., those Indians, who were nonresidents earlier, and are returning now for permanent stay in India, are permitted to open, hold and maintain with an authorized dealer in India a Resident Foreign Currency (RFC) Account to keep their foreign currency assets. Assets held outside India at the time of return can be credited to such accounts. The foreign exchange received or acquired as gift or inheritance from a person or acquired as gift or inheritance there from or received as the proceeds of life insurance policy claims/maturity/ surrender values settled in foreign currency from an insurance company in India may also be credited to this account. The funds in RFC account are free from all restrictions regarding utilization of foreign currency balances including any restriction on investment outside India.

2. Resident Foreign Currency (Domestic) A/c- A person resident in India can open, hold and maintain with an authorized dealer in India, a Resident Foreign Currency (Domestic) Account, out of foreign exchange acquired in the form of currency notes, Bank notes and travelers cheques from any of the sources like, payment for services rendered abroad, as honorarium, gift, services rendered or in settlement of any lawful obligation from any person not resident in India. The account may also be credited with/opened out of foreign exchange earned like proceeds of export of goods and/or services, royalty, honorarium, etc., and/or gifts received from close relatives and repatriated to India through normal banking channels. The account shall be maintained in the form of Current Account and shall not bear any interest. There is no ceiling on the balances in the account.

3. Exchange Earners Foreign Currency A/c- Exchange Earners' Foreign Currency Account (EEFC) is an account maintained in foreign currency with an Authorized Dealer, i.e. a bank dealing in foreign exchange. The account is a Non-interest bearing current account. One can credit 100 percent of his foreign exchange earnings into this account subject to permissible credits and debits. There is no restriction on withdrawal in rupees of funds held in an EEFC account. However, the amount withdrawn in rupees shall not be eligible for conversion into foreign currency and for re-credit to the account. Funds held in EEFC account can be utilized for all permissible current account transactions and also for approved capital account transactions. EEFC account holders can maintain outstanding balances to the extent of USD 1 million in the form of term deposits up to one year maturing on or before 31st October 2008. The rate of interest will be determined by the banks themselves. 19

4. Diamond Dollar A/c- Firms and companies dealing in the purchase/sale of rough or cut and polished diamonds/ precious metal jewellery plain, minakari and/or studded with/without diamond and/or other stones with a track record of at least 3 years in import or export of diamonds/ coloured gemstones/ diamond and coloured gemstones studded jewellery/ plain gold jewellery and having an average annual turnover of Rs. 5 crore or above during preceding three licensing years may also carry out their business through designated Diamond Dollar Accounts which can be opened in Authorized Banks. During 2000-2001 Diamond Dollar Account Scheme has been introduced for such items wherein export proceeds will be retained in dollar and such DDA holder will be allowed to utilize dollars in this account for import of rough diamonds and for purchase of rough diamonds/cut and polished diamonds from local market.

5. Foreign Currency Account in the name of Exporters- Exporters have been allowed to open foreign currency accounts in approved Banks and to raise external credits, pay for export related imports from such accounts, and credit export proceeds to such accounts.

20

FOREX Forex (Foreign Exchange) is the international financial market used for trade of world currencies. It has been working since 70s of the 20th century - from the moment when the biggest world nations decided to switch from fixed exchange rates to floating ones. India's share in world forex market has shown growth of 0.9% last year and will grow further. It is the fastest growth of any country. The growth rates of developed countries is much lower compared with developing countries.UK and US have shown the lowest change in contribution of foreign exchange. In India people are now more aware of the kinds of trading like derivative markets, options, swapping, hedging etc. The most important characteristic of forex is the impact on various currencies by the change in one currency rates. Any economic activity in world affects the forex market immediately. The overall approach to the management of Indias foreign exchange reserves takes into account the changing composition of the balance of payments and endeavors to reflect the liquidity risks associated with different types of flows and other requirements. As capital inflows during 2007-08 were far in excess of the normal absorptive capacity of the economy, there was substantial accretion to foreign exchange reserves by US $ 110.5 billion.

TYPES OF TRANSACTIONS Current account- It is a deposit account held at a bank or other financial institution, for the purpose of securely and quickly providing frequent access to funds on demand, through a variety of different channels. These are meant neither for the purpose of earning interest nor for the purpose of savings, but for convenience of the business or personal client; thus they do not bear interest. Instead, a customer can deposit or withdraw any amount of money any number of times, subject to availability of funds.

Capital account- The capital account is one of the accounts in shareholders' equity. Sole proprietorships have a single capital account in the owner's equity. Partnerships maintain a capital account for each of the partners. It is an account in which a firm records expenditure on capital items. The main components of capital account include foreign investment, loans and banking capital. Foreign investment comprising foreign direct investment and portfolio investment represents non-debt liabilities, while loans (external assistance, external commercial borrowings and trade credit) and banking capital including nonresident Indian deposits are debt liabilities. The net results includes foreign direct investment, plus changes in holdings of stocks, bonds, loans, bank accounts, and currencies.

21

22

FOREIGN EXCHANGE Foreign exchange consists of trading one type of currency for another. Unlike other financial markets, the FX market has no physical location and no central exchange. It operates "over the counter" through a global network of banks, corporations and individuals trading one currency for another. The FX market is the world's largest financial market, operating 24 hours a day with enormous amounts of money traded on a daily basis. MEANING AND CHARACTERISTIC FEATURES OF FOREIGN EXCHANGE Sec. 2 (n) of FEMA provides the meaning and definition of foreign exchange. It includes the following four itemsa. Foreign Exchange primarily means foreign currency b. It also means Deposits, Credits and balance payable in foreign currency. c. It also means drafts/travelers cheques/Letter of Credit/bill of exchange drawn in foreign currency by banks outside India. d. Lastly it also means drafts/traveler cheque/letter of credit/bill of exchange expressed in rupees but payable in foreign currency. Broadly speaking foreign exchange includes all claims payable abroad. It consists of cheque, bills, deposits payable outside India. It also consists of funds held in foreign currency with banks abroad. Characteristic features of foreign exchange market 1. No exact location 2. An OTC market (Not listed or available on an officially recognized stock exchange but traded in direct negotiation between buyers and sellers) 3. Twenty four hour market 4. Very volatile 5. Major players(There are at least six of them: commercial and investment banks, central banks, hedge funds, corporations, high net-worth individuals, and just simple individuals.) 6. ADs as market makers 7. Foreign exchange market 8. 5 day operation BUYING AND SELLING OF FOREIGN EXCHANGE (TRANSACTION) In a typical foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. They are mainly done in two ways. They are buying and sale of foreign exchange, as in forex either you buy or you sell. They can be further explained as -

23

Buying Transaction- In this the authorized dealer buys foreign exchange and makes payment in rupees. In general all remittances into India (Inward Remittance) in foreign exchange, when converted into rupees result in Buying Transaction Sale Transaction- The AD sells foreign exchange and takes payment in rupees. Buying and Selling Rates 1. Exchange rates- The exchange rates between two currencies specify how much one currency is worth in terms of the other. It is the value of a foreign nations currency in terms of the home nations currency.

2. Exchange Rate Quotations- An exchange system quotation is given by stating the number of units of "quote currency" (price currency, payment currency) that can be exchanged for one unit of "base currency" (unit currency, transaction currency). For example, in a quotation that says the USD/INR exchange rate is 46.5354 (46.5354 INR per USD), the quote currency is INR and the base currency is USD.

3. Two Way Direct Quote- The foreign exchange quotation typically consists of two quotations or rates: buying rate (bid price) and selling rate (ask price). Both the prices will be different because the foreign exchange dealers obviously want a profit out of each transaction. Suppose if a dealer bank quotes British pound sterling 1 = 1.50 USD 1.57 USD; this means that the dealer bank is ready to purchase British pound sterling at $1.50 and sell at $1.57.

4. Different types of Buying and Sale ratesA. 1 2 3 4 5 B. 1 2 3 4 BUYING RATES TT buying Bills buying TC buying FC buying Other instrument rates SELLING RATES TT selling rate Bill selling rate TC selling rate FC selling rate 24 Applicability Where AD has received foreign exchange in its nostro account Where AD is yet to receive foreign exchange in its nostro account Traveler cheques, encashment Foreign currency notes encashment Personal cheques, IMO, BC, encashment Sales not involving handling of documents/bill of exchange Sales involving handling of documents Sale of traveler cheque Sale of foreign currency notes

SETTLEMENT OF FOREIGN EXCAHNGE TRANSACTIONS How is the sale and purchase transactions settled between banks? For this the Authorized Dealer has foreign currency accounts at foreign centre and the foreign banks have their accounts with banks in India. Like1. Nostro account- An account that a bank holds with a foreign bank. A nostro (means "ours" in Latin) account is maintained by a Local bank with a foreign bank that allows the Local bank to buy foreign currency. Nostro accounts are usually in the currency of the foreign country. This allows for easy cash management because currency doesn't need to be converted. Example: When X (Buyer) a trader in Base Country wants to purchase $5000 worth of goods by paying cash. Mr. X deposits the cash in his local bank in the country's currency for the corresponding amount ($5000) then a swift message is sent to the corresponding bank in the foreign country where the local bank holds a NOSTRO account requesting the bank to make the payment to Y (Seller) in his local currency i.e. US Dollars; Thus facilitating the trade between X & Y. 2. Vostro account- A vostro (means "yours" in Latin) account is an account maintained by an overseas bank with a Local bank that allows the overseas bank to purchase Local currency. A Vostro Account is in the account holder's currency. Example: Taking the above example, if Y wanted to buy something from X then the foreign bank would complete the deal using their VOSTRO account in X's country 3. Loro account- Loro account is not a separate account. It is just the nostro account of another bank. Example: If bank A and bank B are maintaining their nostro accounts with Amex Bank and bank A wants to transfer say US$ 50000 from its nostro account to nostro account of bank b, it would write to Amex Bank- Debit our account by US$ 50000& credit Loro account B bank. Therefore Loro account means their nostro account with you or Third Party Accounts. 4. Mirror account- An authorized dealer maintaining nostro account does also maintain a proforma account at its office (like in India) to record all receipts and payments made into the nostro account. This proforma account is called Mirror Account or Shadow Account. In this the transactions are recorded both in foreign currency and in Indian rupees.

5. Escrow account- A trust account held by a bank to which an accountholder makes monthly or other periodic deposits, and authorizes the bank to withdraw funds to pay for certain fixed obligations such as taxes, rent, and insurance premium. 25

NETWORKS USED IN REMITTANCE OF FOREIGN EXCHNANGE Banks transmit millions of messages per day, many of which contain highly sensitive information. It is important that they have access to a highly reliable and highly secure network through which they can communicate without fear of intercepted or lost messages. Some of the networks are CHIPS /FED WIRE: The Clearing House Interbank Payments System (CHIPS) is the main privately held clearing house for large-value transactions in the United States, settling well over US$1 trillion a day in around 250,000 interbank payments. Together with the Fed wire Funds Service (which is operated by the Federal Reserve Banks), CHIPS forms the primary U.S. network for large-value domestic and international USD payments (where it has a market share of around 96%). This system is now used in the interbank US transfer only and for global transmission SWIFT is being used. For example, if Bank of America is to pay American Express US$1.2 million, and American Express is to pay Bank of America $800,000, the CHIPS system aggregates this to a single payment of $400,000 from Bank of America to American Express only 20% of the $2 million to be transferred actually changes hands. The Fed wire system would require two separate payments for the full amounts ($1.2 million to American Express and $800,000 to Bank of America). SWIFT- SWIFT is the Society for Worldwide Interbank Financial Telecommunication, a member-owned cooperative through which the financial world conducts its business operations with speed, certainty and confidence. Banks use SWIFT to reach their counterparties, achieve operational cost efficiency, enhance their customers experience and improve liquidity risk management. More than 9,000 banking organizations, exchange millions of standardized financial messages daily using this. As such SWIFT does not provide clearing or settlement services, nor does it transfers money. It acts as a secure link between the financial communities to exchange messages about money. Most international bank-to-bank and branch-to-branch transactions relating to corporate payments and account information also use SWIFT - both the message standards and the network. SWIFT messages are a brief document providing the name and code of the originating bank, the name and code of the receiving bank, the amount of the transfer, and one of several preset codes that provide a message to the receiving bank. SWIFT messages are preset and provide standardized conditions for the transfer of funds between banks. Certain phrases are permitted, but they must be short and to the point, and are limited to a certain number of characters. This allows for a highly efficient banking system, since there are a limited number of messages that can be processed under the system. This message, sent from a remitting bank to a receiving bank, would be used to instruct the receiving bank to debit the sending bank's nostro account and to remit funds through the local clearing in the receiving bank's country to a beneficiary at another bank.

26

FOREIGN REMITTANCES The term foreign remittance means, remittances are from a foreign country. It is a general term given to any form of remittances from one country to other countries. Foreign remittance is generally referred to the total amount of money flows into a country from other countries. The major portion of foreign remittances constitutes the money people send to their home country from the earning countries. Foreign remittance has an important role in the economic growth of countries. Types of Foreign Remittances Foreign remittance can be classified into two. They are Foreign inward remittance-the money flown into a country. Foreign outward remittance-refers to the remittances made to a foreign country from home country. TRAVELERS CHEQUES/ CARD AND FOREIGN CURRENY NOTESTravelers Cheque- A travelers cheque is a check that is issued by a financial institution that can be used as a form of payment. Travelers cheques are most often used by those traveling because they are widely accepted as payment in many parts of the world, yet can be replaced if lost or stolen by the issuing financial institution. Travelers cheques are issued in a variety of monetary denominations such as the US Dollar, Euro, Japanese Yen, Canadian Dollar, Australian Dollar, and British Pound. Traveler Currency Card- Travel Currency Card is a prepaid foreign currency card, which is available in many denominations like US Dollars, Euro, Great Britain Pound, Australian Dollar, Canadian Dollar, Singapore Dollar, Swiss Francs etc. Sameer Nemavarkar, senior VP, retail banking and head, retail forex and remittances, Axis Bank said, While travelers cheques have been stagnant in the past three years, the use of pre-paid cards has grown. In case of Axis bank Travel Currency card, the months of April and May 2010 recorded loads of over $100 million. Foreign Currency Notes- Authorized Banks have the authority to buy as well as sell foreign currency notes to a customer. Sometimes banks do this via branch only (usually main offices) but small branches make a deal with FFMCs (Fully Fledged Moneychangers), who then exchange or issue currency, but the transaction is processed through the bank account itself. DEALING ROOM OPERATIONS- A dealing room is a centralized establishment of an AD (i.e. usually of commercial banks) which offers continuously a two-way quote (i.e. buy and sell price) for different currencies throughout the prescribed business hours and buys and sells such currencies with the objective of making profit. All transactions in foreign exchange market are carried out through the dealing rooms of participating banks/AD.

27

BANKING SPECIFICATIONS IN RELATION TO FOREIGN EXCHANGE TRANSACTIONS: 1. Exchange rates (Both spot and forward) 2. Interest Rates 3. Service charges 4. Internal documentation 5. Accounting Procedures 6. Finance and Security

Forex Transaction

SPOT

FORWARD

Ready

TOM

SPOT

After 2 working days

Today

Next working day

2 Working days

DIFFERENT TYPES OF RISKS IN FOREX Forex is considered to be one of the biggest markets of the world. Thousands of transactions take place on a daily basis. As it involves such a large sum so are the risks associated with it. In order to minimize the possibility of financial loss, it is therefore essential on the banks part to identify, measure and manage their foreign exchange risk effectively. Banks are exposed to a number of different risks in the conduct of foreign exchange and general business, and these may be categorized as follows: a) Exchange Rate Risk (Open position) 28

The risk that the bank may suffer losses as a result of adverse exchange rate movements during a period in which it has an open position in a currency is called as exchange rate risk. Where the value of asset/inflow exposures in one currency is not equal to the value of liability/outflow exposures in that currency this is described as an open position. Open positions may be short (liabilities exceed assets) or long (assets exceed liabilities). This is a simplistic definition, and the components of the calculation of an open position are given below. Banks with a short open position in a currency are exposed to the risk that the currency might appreciate, while those with a long open position in a currency are exposed to the risk that the currency might depreciate. It refers to the fluctuations in currency prices over a trading period. Prices can fall rapidly resulting in substantial losses unless stop loss orders are used when trading FOREX. Stop loss orders specify that the open position should be closed if currency prices pass a predetermined level. Stop loss orders can be used in conjunction with limit orders to automate FOREX trading limit orders specify an open position should be closed at a specified profit target. b) Cash Balance Risk Cash balance refers to actual balances maintained in the nostro accounts at the end-of each day. Balances in nostro accounts do not earn interest: while any overdraft involves payment of interest. The endeavor should, therefore, be to keep the minimum required balance in the nostro accounts. However, perfection on the count is not possible. Depending upon the requirement for a single currency more than one nostro account may be maintained. Each of these accounts is operated by a large number of branches. Communication delays from branches to the dealer or from the foreign bank to the dealer may result in distortions. c) Settlement Risk Also known as time zone risk, this is a form of credit risk that arises from transactions where the currencies settle in different time zones. For example, where a bank enters into a transaction to sell Australian Dollars and buy US Dollars, they are obliged to pay AUD to the counterparty some 15 hours before they are able to receive their USD in settlement. A transaction is not complete until settlement has taken place in the latest applicable time zone. This is also referred to as Herstatt Risk. d) Credit Risk This risk arises from the failure or default of counterparty. Technically, this is a credit risk where only one side of the transaction has settled. If counterparty fails before any settlement of a contract occurs, the risk is limited to the difference between the contract price and the current market price (i.e. an exchange rate risk). It is the possibility that one party in a FOREX transaction may not honor their debt when the deal is closed. This may happen when a bank or financial institution declares insolvency. Credit risk is minimized by dealing on regulated exchanges which require members to be monitored for credit worthiness. Credit risk can be classified into (a) contract risk and (b) clean risk.

29

Contract Risk: arises when the failure of the counterparty is known to the bank before it executes its part of the contract. Here the bank also refrains from the contract. The loss to the bank is the loss arising out of exchange rate difference that may arise when the bank has to cover the gap arising from failure of the contract. Clean Risk Arises when: the bank has executed the contract, but the counterparty does not. The loss to the bank in this case is not only the exchange difference, but the entire amount already deployed. This arises, because, due to time zone differences between different centres, one currently is paid before the other is received.

e) Country Risk/ Sovereign Risk Also known as sovereign risk or transfer risk, country risk relates to the ability and willingness of a country to service its external liabilities. It refers to the possibility that the government as well other borrowers of a particular country may be unable to fulfill the obligations under foreign exchange transactions due to reasons which are beyond the usual credit risks. For example, an importer might have paid for the import, but due to moratorium imposed by the government, the amount may not be repatriated. There is more country risk associated with 'exotic' currencies than with major currencies that allow the free trading of their currency. f) Interest Rate Risk It can result from discrepancies between the interest rates in the two countries represented by the currency pair in a FOREX quote. This discrepancy can result in variations from the expected profit or loss of a particular FOREX transaction. g) Fraud Risk Frauds may be indulged in by the dealers or by other operational staff for personal gains or to conceal a genuine mistake committed earlier. Frauds may take the form of the dealings for ones own benefit without putting them through the bank accounts. Undertaking unnecessary deals to pass on brokerage for a kick back, sharing benefits by quoting unduly better rates to some banks and customers, etc. h) Overtrading Risk A bank runs the risk of overtrading if the volume of transactions indulged by it is beyond its administrative and financial capacity. In the anxiety to earn large profits, the dealer or the bank may take up large deals, which a normal prudent bank would have avoided. The deals may take speculative tendencies leading to huge losses. Viewed from another angle, other operators in the market would find that the counterparty limit for the bank is exceeded and quote further transactions at higher premium. Expenses may increase at a faster rate than the earnings. There is, therefore, a need to restrict the dealings to prudent limits. i) Gap Risk/ Liquidity Risk/ Maturity Mismatch Risk This risk arises on account of the maturity period of purchase and sale contracts in a foreign currency not coinciding or matching. The cash flows from purchases and sales mismatch

30

thereby leaving a gap at the end of each period. Therefore, this risk is also known as liquidity risk or gap risk Mismatches in position may arise out of the following reasons:

Under forward contracts, the customers may exercise their option on any day during the month which may not match with the option under the cover contract with the market with maturity towards the month end. Non-availability of matching forward cover in the market for the volume and maturity desired. Small value of merchant contracts may not aggregative to the round sums for which cover contracts are available. In the interbank contracts, the buyer bank may pick up the contract on any day during the option period. Mismatch may deliberately be created to minimize swap costs or to take advantage of changes in interest differential or the large swings in the demand for spot and near forward currencies.

j) Operational Risk These risks include inadvertent mistakes in the rates, amounts and counterparties of deals, misdirection of funds, etc. The reasons may be human errors or administrative inadequacies. The deals are done over telecommunication and mistakes may be found only when the written confirmations are received later. TRANSPORT DOCUMENTS In international trade, the seller sells goods under a contract of sale agreed with the buyer and the goods must be sent by the seller physically from one country to another so that the buyer can obtain the goods, sell them and pay the seller. This movement of goods, which is by sea, air, rail or truck, involves the following stages: The seller must arrange for the goods to be handed over to a carrier directly or through an agent or a freight forwarder. The carrier or their agent acknowledges that goods have been received for transport, in terms of the sellers instructions, to the buyer in the destination country. The carrier or their agent issues a transport document which acknowledges the receipt of goods from the seller and states the terms and conditions upon which the carrier undertakes the transport of goods. By sea- bill of lading By sea- sea way bill By air- airway bill By both land and sea- combined transport document or multimodal transport document

31

Document Shipping Order S/O

Functions A document to give details of the cargo and the shipper's requirements. It is the basic document for preparing other transport documents such as bill of

Prepared by Shipper / Transport Companies Shipping Company

lading, air waybill, etc. Dock Receipt D/R A receipt to confirm the receipt of cargo on or Mate's Receipt quay/warehouse pending shipment. The dock receipt is used as documentation to prepare a bill of lading. It has Bills of Lading ( B/L) no legal role regarding processing financial settlement. An evidence of contract between the shipper of the goods and the carrier. The customer usually needs the original as proof of ownership to take possession of the goods. There are two types: a STRAIGHT bill of lading is non-negotiable and a negotiable or shipper's ORDER bill of lading (also a title document) which can be bought sold or traded while goods are in transit and is House Bill of Lading (Group age) used for many types of financing transactions. A bill of lading issued by a forwarder and, in many cases, not a title document. Shippers choosing to use a house bill of lading should clarify with the bank whether it is acceptable for letter of credit purpose before the credit is opened. Advantages include less packing, lower insurance premiums, quicker transit, less risk of damage and lower rates than cargo as an Sea Waybill individual parcel / consignment. A receipt for cargo which incorporates the contract of carriage between the shipper and the carrier but is nonAir Waybill (AWB) negotiable and is therefore not a title document. A kind of waybill used for the carriage of goods by air. This serves as a receipt of goods for delivery and states the condition of carriage but is not a title document or transferable/negotiable instrument. 32

Shipping Company

Forwarder

Shipping Company Airline

House Air

An air consignment note issued by an air freight agent

Forwarding Agent

Waybill (HAWB) to provide the cargo description and records. Again, it Shipping Guarantee

is not a title document. Usually a pre-printed form provided by a shipping Importer's Bank / company or the bank, given by an importer's bank to the shipping company to replace the original transport document. The consignee may then in advance take delivery of goods against a shipping guarantee without producing the original bill of lading. The consignee and the importer bank will be responsible for any loss or charges occurred to the shipping company if fault is found in the collection. It is usually used with full margin or trust receipt to protect the bank's control to the goods. A list providing information needed for transportation purpose, such as details of invoice, buyer, consignee, country of origin, vessel/flight date, port/airport of loading, port/airport of discharge, place of delivery, shipping marks / container number, weight / volume of merchandise and the fullest details of the goods, including packing information. Shipping Company / Consignee

Packing List (sometimes as packing note)

Shipper

33

FOREIGN EXCHANGE IN INDIA The Indian forex market owes its origin to the important step that RBI took in 1978 to allow banks to undertake intra-day trading in foreign exchange. As a consequence, the stipulation of maintaining square or near square position was to be complied with only at the close of business each day. During the period 1975-1992, the exchange rate of rupee was officially determined by the RBI in terms of a weighted basket of currencies of Indias major trading partners and there were significant restrictions on the current account transactions. The initiation of economic reforms in July 1991 saw significant two-step downward adjustment in the exchange rate of the rupee on July 1 and 3, 1991 with a view to placing it at an appropriate level in line with the inflation differential to maintain the competitiveness of exports. Subsequently, following the recommendations of the High Level Committee on Balance of Payments (Chairman: Dr C. Rangarajan) the Liberalized Exchange Rate Management System(LERMS) involving dual exchange rate mechanism was instituted in March 1992, which was followed by the ultimate convergence of the dual rates effective from March 1, 1993(christened modified LERMS). The unification of the exchange rate of the rupee marks the beginning of the era of market determined exchange rate regime of rupee, based on demand and supply in the forex market. The appointment of an Expert Group on Foreign Exchange (popularly known as Sodhani Committee) in November 1994 is a landmark in the design of foreign exchange market in India. The Group studied the market in great detail to develop, deepen and widen the forex market. In the process of development of forex markets, banks have been accorded significant initiative and freedom to operate in the market. To quote a few important measures relating to market development and liberalization, banks were allowed freedom to fix their trading limits, permitted to borrow and invest funds in the overseas markets up to specified limits, accorded freedom to determine interest rates on FCNR deposits within ceilings and allowed to use derivative products for asset-liability management purposes. Similarly, corporate were given flexibility to book forward cover based on past turnover and allowed to use a variety of instruments like interest rates and currency swaps, caps/collars and forward rate agreements in the international forex market. Rupee-foreign currency swap market for hedging longer -term exposure has developed substantially in the last few years. As per the BIS Triennial Survey on the global foreign exchange and derivatives market activity (2007), the foreign exchange market in India has grown into the 16th largest market in the world in terms of total daily turnover which was US$34 billion in 2007.

34

REGULATORY BODIES OF FOREIGN EXCHANGE IN INDIA FOREIGN EXCHANGE MANAGEMENT ACT (FEMA): The Foreign Exchange Management Act (1999) or in short FEMA has been introduced as a replacement for earlier Foreign Exchange Regulation Act (FERA). FEMA came into act on the 1st day of June, 2000. The Federal Emergency Relief Act, passed at the outset of the New Deal by Congress on May 12, 1933, was the opening shot in the war against the Great Depression. It created the Federal Emergency Relief Administration (FERA), which was allotted a start-up fund of $500 million from the Reconstruction Finance Corporation to help the needy and unemployed. The main objective behind the Foreign Exchange Management Act (1999) is to consolidate and amend the law relating to foreign exchange with objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. FEMA is applicable to the all parts of India. The act is also applicable to all branches, offices and agencies outside India owned or controlled by a person. 1 . 2 . FERA VS FEMA FERA FEMA FERA aimed to control FX with sole FEMA aims to manage foreign exchange objective to conserve the same and develop foreign exchange market in India It prohibited almost all FX transactions It permits all current a/c transactions except and stipulated for specific and general some reasonable restrictions which can be permission to do so. The basic imposed by the Central Government. It principle was that nothing was prescribes a brief list of what is not permitted except what was specifically permitted and thus giving freedom in all the mentioned. remaining areas. It considered the violation of most of It is a Civil Law with no criminal its provisions as criminal offence and consequences. Contravention of FEMA provided for imprisonment for most of provisions bring in fine and no them. imprisonment except when the offender does not pay the fine. The burden of proof regarding The burden of proof regarding violation of violation of FERA squarely lied with FEMA lies with Directorate and Courts. the accused. The definition of non-resident Indian The definition of NRI is in harmony with was not in harmony with income Tax Income Tax Act. Act. It did not define current a/c and capital It provides a clear definition of current a/c a/c transactions. and capital a/c transactions.

3 .

4 . 5 . 6 .

35

FOREIGN EXCHANGE DEALERS ASSOCIATION OF INDIA (FEDAI) It was set up in 1958 as an Association of banks dealing in foreign exchange in India (typically called Authorized Dealers - ADs) as a self regulatory body and is incorporated under Section 25 of The Companies Act, 1956. Its major activities include framing of rules governing the conduct of inter-bank foreign exchange business among banks vis-vis public and liaison with RBI for reforms and development of forex market. Presently some of the functions are as follows:

Guidelines and Rules for Forex Business. Training of Bank Personnel in the areas of Foreign Exchange Business. Accreditation of Forex Brokers Advising/Assisting member banks in settling issues/matters in their dealings. Represent member banks on Government/Reserve Bank of India/Other Bodies. Announcement of daily and periodical rates to member banks.

Due to continuing integration of the global financial markets and increased pace of deregulation, the role of self-regulatory organizations like FEDAI has also transformed. In such an environment, FEDAI plays a catalytic role for smooth functioning of the markets through closer co-ordination with the RBI, other organizations like FIMMDA (Fixed Income Money Market and Derivatives Association of India), the Forex Association of India and various market participants. FEDAI also maximizes the benefits derived from synergies of member banks through innovation in areas like new customized products, bench marking against international standards on accounting, market practices, risk management systems, etc.

36

EXPORTS CREDIT GUARANTEE CORPORATION (ECGC) Export Credit Guarantee Corporation of India Limited was established in the year 1957 by the Government of India to strengthen the export promotion drive by covering the risk of exporting on credit. Being essentially an export promotion organization, it functions under the administrative control of the Ministry of Commerce & Industry, Department of Commerce, Government of India. It is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking, insurance, and exporting community. ECGC is the fifth largest credit insurer of the world in terms of coverage of national exports. The present paid-up capital of the company is Rs.800 crores and authorized capital Rs.1000 crores. What does ECGC do? Provides a range of credit risk insurance covers to exporters against

loss in export of goods and services Offers guarantees to banks and financial institutions to enable

exporters to obtain better facilities from them Provides Overseas Investment Insurance to Indian companies

investing in joint ventures abroad in the form of equity or loan

37

FOREIGN EXCHANGE AT BRANCH LEVEL (FOREX MANAGEMENT IN VASASNT VIHAR BRANCH) Forex transactions are mainly divided into five parts. They are1. 2. 3. 4. 5. IMPORTS: It includes(A) Imports 1. Advance - When an overseas exporter asks to make full payment in advance for the goods to be exported to, advance remittance is done. The exporter would dispatch the goods after he receives full payment. For this purpose, Axis Bank will make the remittance in foreign currency to the exporter. 2. Direct Bill- The importer sometimes requires the exporter overseas to dispatch the goods first and then remit the payment for the goods. The exporter would then dispatch the goods and will then send the documents directly to the importer. He then approaches the bank along with the documents for sending remittance to the exporter, and the bank ensures that the remittance is done promptly. 3. Collection Bill- The exporter from overseas exports the goods. The overseas exporter / exporter's bank sends the documents to Axis Bank on collection. The bank will then intimate the importer about the receipt of the documents. All he need to do is to authorize bank to debit his a/c and send the remittance to the exporters bank. If it is a sight bill (Documents against Payment), then the necessary documents and debit authority is collected from importer and remittance is paid to the exporters bank and the documents are released to him. If it is a usance bill (Documents against Acceptance), then the acceptance letter is taken from him and the documents are released. On the due date remittance is made to the exporters bank by debiting his account. (B) Other than Imports 1. Gifts 2. Royalties 3. Freight 38 Import Export Remittances Return and Statement Miscellaneous Work

4. Education Fee Documents RequiredAn import bill received by an AD usually comprise following documents1. 2. 3. 4. Commercial Invoice Transport/ Shipping documents Packing list Certificate of Origin/ Insurance and any other documents as demanded by importer. 5. Import Bill on Collection (Annexure) 6. Form A1 Evidence of importAfter the import has been made, the importer is required to submit the proof the imports made. They are1. In case of Physical imports--In case of all imports, where value of foreign exchange remitted/paid for import into India exceeds USD 100,000 or its equivalent, it is obligatory on the part of the AD Category I bank, to ensure that the importer submits:a). The Exchange Control copy of the Bill of Entry for home consumption, Or b). The Exchange Control copy of the Bill of Entry for warehousing, in case of 100% Export Oriented Units, Or c). Customs Assessment Certificate or Postal Appraisal Form, as declared by the importer to the Customs Authorities, where import has been made by post, as evidence that the goods for which the payment was made have actually been imported into India. -- In respect of imports on D/A basis, AD Category I bank should insist on production of evidence of import at the time of effecting remittance of import bill. However, if importers fail to produce documentary evidence due to genuine reasons such as non-arrival of consignment, delay in delivery/customs clearance of consignment, etc., AD bank may, if satisfied with the genuine of request, allow reasonable time, not exceeding three months from the date of remittance, to the importer to submit the evidence of import. 2. Evidence of import in lieu of Bill of Entry(i) AD Category I bank may accept, in lieu of Exchange Control copy of Bill of Entry for home consumption, a certificate from the Chief Executive Officer (CEO) or auditor of the company that the goods for which remittance was made have actually been imported into India provided :(a) The amount of foreign exchange remitted is less than USD 1,000,000 or its equivalent, (b) The importer is a company listed on a stock exchange in India and whose net worth is not less than Rs.100 crore as on the date of its last audited balance sheet, 39

or the importer is a public sector company or an undertaking of the Government of India or its departments. (ii) The above facility may also be extended to autonomous bodies, including scientific bodies/academic institutions, such as Indian Institute of Science / Indian Institute of Technology, etc. whose accounts are audited by the Comptroller and Auditor General of India (CAG). AD Category I bank may insist on a declaration from the auditor/CEO of such institutions that their accounts are audited by CAG. 3. In case of Non-physical imports(i) Where imports are made in non-physical form, i.e., software or data through internet / datacom channels and drawings and or data through internet / datacom channels and drawings and designs through e-mail/fax, a certificate from a Chartered Accountant that the software / data / drawing/ design has been received by the importer, may be obtained. (ii) AD Category I bank should advise importers to keep Customs Authorities informed of the imports made by them under this clause

OUTWARD REMITTANCE When any person or firm or organization resident in India, desires to transfer funds from India to any place outside India, it gives rise to foreign outward remittance. Axis Bank is an Authorized Dealer and has been delegated powers to effect outward remittances on behalf of their constituents subject to certain conditions and subject to completion of certain formalities. Outward remittances can be effected by: Transfer through SWIFT The SWIFT message MT 100 is highly secure, quickest and efficient method of fund transfer. The bank has arrangement with over 200 major banks across the globe to receive SWIFT messages. Transfer through Telex If SWIFT facilities are not available from the place you are remitting funds, you can also transfer funds through tested telex messages. We have test key arrangements with major banks across the globe. Through these arrangements across the globe we ensure that remittances reach your desired destination at the quickest possible. Demand Draft This mode of remittance of funds is used to effect remittance in favor of a named payee by means of an instrument. Upon deposit of rupee equivalent of draft amount together with commission and completion of Exchange Control requirements, the DD is issued in foreign currency. The Demand Draft can be sent to the beneficiary, who receives payment from drawee bank on presentation.

40

DocumentationIt is an important part of all remittances. A list of general documents to be obtained from the customer is Application cum Declaration form prescribed by Treasury Dept. A2 form as prescribed by RBI Any specific documents prescribed by RBI for the said remittance Documents prescribed by Axis Bank (Annexure)

Liberalized Remittance Scheme The Liberalized Remittance Scheme is a facility available for making remittance up to USD 200,000 per financial year for permissible current or capital account transactions or a combination of both. All resident individuals are eligible to avail of the facility under the USD 200,000 scheme. However it is mandatory to have a PAN number to make a remittance under this scheme, and the account with the Bank must be at least 1 year old. This facility is not be available to corporate, partnership firms, HUF, Trusts, etc. Also, remittance cannot be done from any loan/overdraft account. Under this facility, resident individuals can freely acquire and hold immovable property, shares or any other asset outside India without prior approval of Reserve Bank of India. It is not available for purposes specifically prohibited (Schedule I) or regulated by the Government of India (Schedule II) of Foreign Exchange Management (Current Account Transactions) Rules, 2000. In case of remittances for any services availed from abroad such as consultancy charges/legal fees/training fees etc., in addition to the documents as specified from Small Value Remittances, a Certificate from a Chartered Accountant in Form 15CA and 15CB stating that tax u/s 195 has been deducted from the payment.

41

Process Flow for Outward Remittance

Customer with payment request Adhere to KYC guidelines Branch delivers customer advice and SWIFT copy

Check all documents and forms

SWIFT Authorization

SWIFT Entry Can the remittance be allowed? Authorization of Check balance and take rates from dealing room Entry

Scan and send to TFC

Complies with it

Bank checks what is required

System Entry

If rejected TFC Compliance If approved

42

EXPORTS: It includes1. Advance- The exporter (in India) might require that the importer overseas to make advance payment for the goods that he is importing. He might ask the importer to send the payment to any of the vast network of Axis Bank branches. The payment will be credited to his (the exporters) account. 2. Collection Bill- When the goods are exported overseas, the exporter needs to receive payment for the goods that has been exported. Therefore, through the banks collection process for all the export bills is done, provided all the necessary documents are in place, which will be sent to overseas bank for collection. EXPORT CREDIT 1 2 3 4 5 Pre Shipment credit Post-shipment credit Credit in foreign currency (PCFC) Credit in rupees Powers delegated to authorized dealers to decide quantum of loan

INWARD REMITTANCE Receipt of foreign exchange in India is called Inward remittance. Apart from exports there are other transactions, which generate inward remittance. For example Non-resident Indian staying abroad may remit foreign exchange to their relatives in India. Inward remittances are usually in the nature of foreign currency notes, foreign currency traveler cheques, foreign currency cheques / foreign currency demand drafts and inward telex transfers. Axis Bank facilitates transfer of funds through six recognized currencies that includes USD, EURO, GBP, AUD, CAD and JPY and also through the currencies of the customers preference. The bank also emails the status of the funds remitted to ensure their safety. Funds can be remitted to beneficiaries in India easily by: Transfer through SWIFT The SWIFT message is a highly secure and efficient method of fund transfer. The bank has arrangements with over 200 major banks across the globe to receive SWIFT messages. Most of the branches are directly connected to the globe via SWIFT to ensure that the remittance is secure and safe from any place. 43

 Transfer through Telex If SWIFT facilities are not available from the place of remitting funds, the funds can also be transferred through tested telex messages. The bank has test key arrangements with major banks across the globe. Demand Drafts Remittances can also be sent to India through demand drafts payable at its branches. Remit2India Axis Bank and Times of Money offer an online remittance service through Remit2India. Remit2India facilitates easy transfer of money to India to over 6,000 locations across the country. The money will be either delivered at the doorstep of your beneficiary or directly credited into the account. You can track the status of your transaction online and avail of the 24-hour chat and toll-free facilities.

DocumentationUsually only one form is required by the bank called as Fund Disposal Form (FDF) which is mainly for checking rather knowing the purpose of the inward remittance. RETURN AND STATEMENT: All statements under FEMA are return. The four most important returns are1. R Return- Authorised Dealers report all transactions made by them through their Nostro accounts abroad and Vostro accounts maintained with them in appropriate R Return.; i.e. R Return (NOSTRO) and R Return (VOSTRO) respectively twice a month- at the close ob business on 15th and on the last day of the calendar month. 2. XOS Return- This is filed in case of outstanding export bills. If the bill is late for more than 6 months the XOS Return is filed with the RBI. But this is done only when the amount exceeds $ 25000. It consists of two partsPart I Outstanding export bills other than those on deferred payment terms Part II Exports on deferred payment terms where installments (including interest) are outstanding beyond due date 3. BEF Return- This is filed in the case of the details of remittances effected towards import in respect of which documentary evidence has not been received i.e. outstanding bill of entry. It is done when the amount exceeds $25000 and is filed on a half yearly basis. 4. NRD CSR (Non-Resident DepositsComprehensive Single Return) - Submission of data on Non-Resident Deposits in CSR format, on monthly basis, through electronic media (floppy/e-mail) to Department of Statistical Analysis and Computer Services.

44

TRAVELERS CHEQUES AND FOREIGN CURRENY NOTESAs a part of its expanding travel related services, Axis bank offers a one-stop shop for a traveler's foreign exchange needs. They deliver foreign exchange in currency notes or widely accepted travelers cheques according to convenience. Services include Sale of Foreign Currency Notes As authorised dealers, bank has powers delegated by Reserve Bank of India to release foreign exchange for foreign travel. The purpose of travel can be business, vacation or education. Authorized branches can deliver foreign currency notes as per required by the customer in the currency of his choice, US Dollars and Pound Sterling being the general currency used by travelers. Sale of Foreign Currency Traveler Cheques Travelers cheques (TCs) are a convenient risk free form of carrying money and TCs are encashable at a number of locations across the world. All authorized branches sell foreign currency traveler cheques, which can be purchased as per the requirement. One can buy a MasterCard or Visa Travelers cheques issued by American Express, Thomas Cook or Citi-Corp. Travelers cheques are sold in all major currencies. Purchase of Foreign Currency Notes and Travelers cheques The bank purchases foreign currency notes in all major currencies from : o Foreign tourists on a visit to India o Indian residents surrendering surplus foreign currency o Authorised moneychangers like Hotels, Emporia etc., who have received foreign currency towards payment of goods and services in the course of their business o Authorised full-fledged moneychangers TRAVELER CURRENCY DEBIT CARD (TCDC) Axis Bank's Travel Currency Card is available off the shelf at the nearest Axis Bank Branch and select FFMCs (Full Fledged Moneychangers), the Travel Currency Card is a secure, convenient and hassle free way to carry money and make payments when in foreign shores. The Travel Currency Card gives a 24-hour access to the money. Withdrawing funds in the local currency from any Visa or Visa Plus ATM's as well as paying for all the purchases in any country, anywhere in the world. The Axis Bank Travel Currency Card is a prepaid foreign currency card, which is available in the following denominations and the minimum requirements on the 8 currency denominations are USD-250; EURO-200; GBP-150; AUD-300; CAD-300; SGD-350; CHF300, SEK-1500 and JPY 30000. The maximum amount of foreign currency that can be loaded on to the card is as per the extant guidelines of the Reserve Bank of India.

45

The Travel Currency Card USD variant is available on Visa as well on MasterCard platform. The other currency variants, i.e. EUR,GBP,AUD, CAD, SGD, CHF, SEK and JPY are Visa Flag unembossed Cards that can be used to withdraw cash from 1 million Visa or Visa Plus ATMs and for purchase transactions at over 14 million merchant outlets across the world.

DocumentationThe documents required for the sale or purchase of TC and Currency notes are1. Copy of Passport 2. Copy of Visa 3. Ticket/ Reservation Slip 4. Form A2 FOREIGN CURRENCY DEMAND DRAFT (FCDD) The FC DD facility can be used to make payments for various purposes like:

Payment of University fees abroad Making a gift remittance to a friend or relative Payment of application fees for various exams like TOEFL, GMAT etc. Payment for medical treatment abroad And all other permitted purposes as per the RBI guidelines.

FC Demand Drafts are issued in currencies such as United States Dollars (USD), Great Britain Pounds (GBP), EURO, Japanese Yen (JPY), Australian Dollars (AUD), Canadian dollars (CAD), New Zealand Dollars (NZD), Hong Kong Dollars (HKD), Swiss Francs (CHF) and Singapore Dollars (SGD). LETTER OF CREDIT A letter of credit is a promise to pay. Banks issue letters of credit as a way to ensure sellers that they will get paid as long as they do what they've agreed to do. Letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount is known as LC. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. Letters of credit are often used in international transactions to ensure that payment will be received. Due to the nature of international dealings including factors such as distance, differing laws in each country and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. The bank also acts

46

on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped. For example, importers and exporters might use letters of credit to protect themselves. In addition, communication can be difficult across thousands of miles and different time zones. A letter of credit spells out the details so that everybody's on the same page.

47

BIBLIOGRAPHY

1. AXIS Bank Official website- www.axisbank.com 2. RBI Official website- www.rbi.org.in 3. Annual Report of AXIS Bank 4. Official website of FEMA- www.femaonline.com 5. Official website of FEDAI- www.fedai.org.in 6. Google Search engine 7. Wikipedia- www.wikipedia.com 8. www.investopedia.com 9. www.banknetindia.com 10. Interaction with concerned employees

48