Structure and Functionality of International

Banks
 Structure of Global Banking System
 Bank of international Settlements ( BIS)
 Central Banks
 Commercial Banks
 The Bank for International Settlements (BIS) is an
international financial institution owned by central banks which
"fosters international monetary and financial cooperation and
serves as a bank for central banks". The BIS carries out its work
through its meetings, programmes and through the Basel Process
– hosting international groups pursuing global financial stability
and facilitating their interaction. It also provides banking services,
but only to central banks and other international organizations. It
is based in Basel, Switzerland, with representative offices in Hong
Kong and Mexico City.
Foreign Exchange Market

 Market is a place where buyer and seller meet for enabling

transaction.
 The foreign exchange market is the market in which
participants are able to buy, sell, exchange and speculate on
currencies. Foreign exchange markets are made up of banks,
commercial companies, central banks, investment
management firms, hedge funds, and retail forex brokers and
investors. The forex market is considered the largest financial
market in the world.
Unique characteristics of Foreign Exchange
Market
 Highly Liquid
 Open 24 Hours a Day, 5 Days a Week
 Leverage
 Leverage is a loan given to an investor by his broker. With this loan, investors
are able to enhance profits and gains by increasing traders’ and investors’
control over the currencies they are trading.
 For example, investors who have a $1,000 forex market account can trade
$100,000 worth of currency with a margin of 1%, with a 100:1 leverage.
 The Biggest in the World of Finance
 LOWER TRADING COSTS
 With lower costs, the possible losses are also much lower.You will discover
that forex trading usually has no commission fees unlike in other investments.
The costs of forex trading are limited to the spread or the difference between
the selling and buying prices for a particular currency
Unique characteristics of Foreign Exchange
Market
 Accessible from anywhere
 Excellent transparency
 Strong market trends
 Forex traders make money by getting accurate market data and
then analyzing the direction the market takes. To do this, forex
traders rely heavily on trends and trending in an attempt to
predict the direction of the forex market. Most traders use
technical analysis to analyze past and present forex market data
and then search for trends.
 Other financial markets use trends and trending but this
characteristic is much stronger in the forex market. Due to
strong trending, forex markets are much easier to analyze and
identify possible entry and exit positions during trading.
Participants in the Foreign Exchange
Market
1. Consumers and Travellers
 Consumers may purchase goods in a foreign country or via the
internet with their credit card.
 The amount consumers pay in the foreign currency will be
converted to their home currency on their credit card statement.
 Travelers must go to a bank or currency exchange bureau to
convert one currency (their "home" currency) into another (the
"destination" currency) when using cash to pay for goods and
services in a foreign country.
 Travelers need to be aware of exchange rates to ensure they
receive a fair deal.
Participants in the Foreign Exchange
Market
2. Businesses
 Businesses often need to convert currencies when they conduct
trade outside their home country.
 Large companies need to convert huge amounts of currency; a
multinational company such as General Electric (GE) for
instance, converts tens of billions of dollars each year.
3. Investors and Speculators
 Investors and speculators require currency exchange whenever
they deal in any foreign investment, be it equities, bonds, bank
deposits, or real estate.
 Investors and speculators also trade currencies in an attempt to
benefit from movements in the currency exchange markets.
Participants in the Foreign Exchange
Market
4. Commercial and Investment Banks
 Commercial and investment banks trade currencies as a service to
their commercial banking, deposit, and lending customers.
 These institutions also participate in the currency market for hedging
and speculative purposes.
5. Governments and Central Banks
 Governments and central banks trade currencies to improve economic
conditions or to intervene in an attempt to adjust economic or
financial imbalances.
 Because they are non-profit, governments and central banks do not
trade with the intention of earning a profit, but because they tend to
trade on a long-term basis, it is not unusual for some trades to earn
revenue.
Participants in the Foreign Exchange
Market
 A Money Changer- Is also an entity which is authorized by RBI
to deal in foreign exchange with individual or other Non bank
customers .
 They have to surrender all the foreign exchange received
On the basis of Wholesale and Retail

Indian Foreign
Exchange
Market

Wholesale Retail

Giant Other
Transaction Transaction
Layer Layer
Wholesale Market
 Giant Transaction Layer: Very large commercial bank deal
with each other. The exposure of these giant bank is usually
higher. They directly deal with each other without any
intermediaries.
 Other Transaction Layer: It is one which slightly smaller
commercial banks deal with each other for themselves or on
behalf of their customers . Their degree of exposure is lesser
than the giant commercial bank
 Since most of the transactions in the wholesale segment are
between banks hence it is called as Interbank Market
Wholesale Market Segments
 1st Segment- It consists of transactions between RBI and the
Authorized dealers ( Mostly commercial banks)
 2nd Segment- Interbank market in which the AD deal with each
other
 3rd Segment- Consists of transactions between Ads and their
corporate customers.
 In interbank market volumes are finalized . In Indian wholesale
market standard lot is USD 1 million
 Rates used between authorized dealers are called interbank rates
 All operational aspects of interbank market are governed by RBI
and FEDAI
 Retail Segment
 End users of foreign exchange approach ADs for rates for
different categories of transactions . The rates quoted by the Ads
to their customers are called Merchant rates
 Merchant Rates
1. Card Rates: these are rates prepared and circulated by dealing
rooms to all authorized branches, the standardized rates are
applied to all small transactions of less than USD 5000. these
are applicable through out the day
2. Ready Rates: these are for transactions exceeding USD 5000,
customized rates are provided by dealing room for individual
transactions. These rates are prepared on the market rate at the
time of reporting
Retail Segment
 No brokers or intermediaries are allowed in this segment of
market
 All the transactions between ADs and their customers are
governed by exchange controlled regulations of RBI
 In addition to Ads RBI also provides license to Money changers
who are allowed to transact only in tourism related instruments
like Travelers cheque and foreign currency notes .
1. Restricted Money changers : permitted only to purchase
foreign currency instruments- 5 star hotels
2. Full fledged Money Changers: Who are allowed to both buy and
sell foreign currency instruments: travel Agencies etc
International Banking- Major Functions

 Facilitate Imports and Exports of their clients- Trade financing

 Arrange for foreign exchange- Cross border transactions and
foreign investments
 Assist in hedging exchange rate risk
 Borrow and lend in the Eurocurrency market
 Participate in international lending
 Participate in Underwriting
 Provide consultancy and advice on hedging strategy, interest
rate and currency swap financing etc.
 These banks are called as universal banks or full service banks
International Activities Of A Bank

Dealing Room

Maintaining a
Export
Foreign
Financing
Currency A/C
Commercial
Bank

Services
related to
Import
Foreign
Financing
exchange for a
foreign bank
Functions Performed By International
Bank
1. Customers Related Functions:
 Trade Finance to exporters – Export Finance
 Trade finance to importers- Import Finance
Export Finance- Pre- shipment Finance
 Financial Assistance availed prior to the shipment of goods to
exporter is termed as pre shipment finance
 Available in home currency as well as foreign currency
 This is being offered to boost the exports and make export
price competitive
 This is given to fund all the expenses relating to purchase ,
manufacturing or packing the Goods , processing the goods etc
before the shipment.
 This whole process is known as packing credit
 This export credit is available for a period of 180 days from the
date of disbursement , In exceptional cases 270 days
 Export Finance- Pre- shipment Finance
 The exporter approaches a commercial bank with the export order
 LC
 And an estimate of the order
 Depending on the documents bank gives pre-shipment credit
 Govt of India has made credit available in foreign currency – Outside
India
 In this the exporter has to bear the risk of currency fluctuations
 PCFC ( Pre Shipment export credit in Foreign Currency)- !80 days
 A bank can give PCFC under 3 schemes
1. Earners foreign currency ( ECFC)
2. Resident Foreign Currency ( RFC)
3. Foreign Currency Non Resident ( FCNR) accounts
Export Finance- Post- shipment
Finance
 Financial Assistance availed after shipment of goods is termed
as post shipment finance
 It is given to an exporter to finance export sales receivables
after the date of shipment of goods till the date of realization
of export proceeds.
 This finance is availed on submission of document evidencing
export to the authorized dealer
 The export documents are to be submitted with 21 days
from the date of the shipment of goods.
Other ways of getting export finance
1. Export Bill rediscounting:
 Banks provide financing of exports by way of discounting of
export bills as post shipment finance
 It can be purchased and discounted
 Arrange bankers acceptance facility ( BAF) for rediscounting
the export bills without any margin and collateral attached
2. Buyer Credit:
 Credit to foreign buyers through EXIM banks
3. Forfeiting:
In trade finance, forfeiting is a financial transaction involving
the purchase of receivables from exporters by a forfeiter. The
forfeiter takes on all the risks associated with the receivables
but earns a margin. Such as Bill of Exchange, promissory notes
NON fund based facility
 Guarantees
 Letter of Credit
 Derivatives offering:- Exchange rate risk- banks provide
derivatives swaps like interest rate swaps etc in order to
hedge
 Remittances: Transfer of funds from one party to another ,
timely transfer is very important as price volatility happens
 Compliances
 Regulatory Function:
1. Adhering to the land requirements
2. More important for international transactions
3. Financial Regulations are important
4. Carefully abide by the rules
 Interbank Functions:
1. Remittances between bank and central bank
2. Not possible to open branches everywhere due to high
operational cost
3. Corresponding relations with other banks- NOSTRO
VOSTRO to remit funds
 Internal Functions
 Branches Management and communication
 Accounting, risk management and forex market,
 Settlement within various offices, money market, investments
of the banks
 Treasury functions- and Monitoring of balance sheet of a bank.
Managing assets and liabilities of banks, risk management,
investment management important constituents of Treasury
function
 LOC – Letter of Credit
 Important for foreign transactions
 Both parties may belong to different countries
 Credibility is utmost importance
 LOC shows that buyer is a credible person and the bank is willing to
pay on his behalf.
 Once LOC is established payment is assured provided documents are
proper.
 What is LOC:
 a letter issued by a bank to another bank (especially one in a different
country) to serve as a guarantee for payments made to a specified
person under specified conditions.
 They are intermediaries between far flung exporters and importers
 Protects non payment
 Banks do not take responsibility of quality of goods
Parties to LOC
 The Importer – The Applicant to LOC
 The Importer Bank ( Issuing Bank)
 The Exporter
 The Exporters Bank that receives the payment from the issuing
bank
Features of LOC
 Negotiability
 Revocability
 Transferability
 Documentation
Documents required for a Letter of Credit
 A clean Bill of Lading:
 A bill of lading is a legal document between the shipper of goods and
the carrier detailing the type, quantity and destination of the goods
being carried.The bill of lading also serves as a receipt of shipment
when the goods are delivered at the predetermined destination. This
document must accompany the shipped goods, no matter the form of
transportation, and must be signed by an authorized representative
from the carrier, shipper and receiver.
 Commercial Invoice Details about the goods
 Certificate of origin
 Warranty of Title
Steps involved in Issue of a Letter of Credit
 Must be international trade transactions between importer
and exporter ( credit basis)
 The importer then request the bank to issue LC
 Bank issues a LC and hand it over to the exporter bank
 The Advising bank ( Exporter bank) gives it to the exporter
 The exporter presents all the relevant documents and takes
the payment from the bank
 The importers bank reimburses the advising bank
 The importer reimburses the issuing bank
LC is a non negotiable instrument but transferable.
Types of Letter of Credit
 Clean and Documentary L/C: Banks payment without any
document relating to transactions
 Revolving and Non Revolving L/C: Revolving- Used for
Multiple transactions credit limit gets reinstated. Non
Revolving- credit limit is fixed.
 Confirmed and Non Confirmed L/C: Confirmed by advising
bank, gives an additional undertaking to make payments. gives
more security. Unconfirmed L/C does not give any
undertaking.
 Transferable and Non Transferable L/C: Exporter
inform the bank for 3rd party payment It is transferrable wherein
when the L/C does not consists of transferring the payment to
third party it is non transferable.
Types of Letter of Credit
 Revocable and Non- Revocable L/C: if the issuing bank has the
right to cancel or change the terms and conditions of a L/C
issued by it without informing t he exporter it is called as
revocable , when a L /C cannot be cancelled or modified
without the consent of the exporter it is called as irrevocable
L/C
 When a bank promises to pay on behalf of the customer . Where
the money comes from?- Importer
 Bank will issue LOC if the bank is confident about payments
 Some buyers have to deposit enough money to cover LOC
Guarantees offered by Banks
 A contract of guarantee is a tri- partite contract
 Legal contract between 3 parties. Seller, Buyer and the Buyer
Bank.
 There is a legal action on non payment of money but it long to
recover his money.
 Hence guarantees provided by the banks are becoming popular
by the banks because if the buyer defaults the bank pays the
money
 Types of Guarantees
 Bid Bond Guarantee: MNC or government invite
competitive bids for construction and turnkey projects. This is
known as Notice inviting tender. this guarantee supports the
applicant obligation to execute a contract if he awarded a bid.
 Advance Payment Guarantee: the guaranteeing bank
undertakes a obligation to compensate advance payment made
by the beneficiary to the principal applicant. Banks undertake
for payments.
 Performance Guarantee: the guaranteeing bank undertakes
a obligation to pay for losses which may arise as a consequence
of the principal/ applicant failing to fulfill his obligation under
the contract
Types of Guarantees
 Retention Guarantee: In this type of guarantee, the
guaranteeing bank undertakes to compensate retention money
paid by the beneficiary, to the principal/ applicant
 Overseas Borrowing guarantee: in this type of guarantee the
guaranteeing bank undertakes to repay the entire loan or credit
facility which includes the amortization of the assets. It applies
from the date on which loan is made till it gets repaid.
 Maintenance Guarantee: In type the guaranteeing bank
undertakes to provide remedies for any defects which become
apparent after delivery of the goods.
ECGC ( Export Credit Guarantee Scheme
ltd)
 The ECGC Limited (Formerly Export Credit Guarantee
Corporation of India Ltd) is a company wholly owned by
the Government of India based in Mumbai, Maharashtra. It
provides export credit insurance support to Indian exporters and
is controlled by the Ministry of Commerce. Government of
India had initially set up Export Risks Insurance Corporation
(ERIC) in July 1957. It was transformed into Export Credit and
Guarantee Corporation Limited (ECGC) in 1964 and to Export
Credit Guarantee Corporation of India in 1983.
Functions of ECGC
 In case of loss of export of goods and services, it provides credit risk
insurance covers to exporters
 Export Credit Insurance covers are offered to banks and financial
institutions to enable exporters to obtain better facilities from them.
 It assists exporters in recovering bad debts.
 It provides information regarding different countries with its own
credit ratings
 For Indian companies investing in joint ventures abroad in the form of
equity or loan, Overseas Investment Insurance is provided.
 It offers insurance protection to exporters in the case of any payment
risks.
 It provides guidance to activities related to export.
 It Provides information regarding creditworthiness of overseas buyers
 Policies of ECGC

 Standard Policy: Suited to cover risks in respect of goods

exported on short term credit i.e. credit not exceeding 180
days. Covers both commercial and political risks from date of
shipment.
 Other specific policies: deigned to protect firms against risks.
Specific policies are issued for specific projects.
 Guarantees- Financial Guarantee, Export performance
guarantee- Insurance covered in behalf of exporters to facilitate
export transactions
ECGC Whole Turnover Post Shipment
Guarantee Scheme
 ECGC is all about protection against non repayment of post
shipment credit by exporters.
 Banks may consider Whole Turnover Post Shipment Policy
for export promotion.
 It is intended to benefit banks.
 The premium is absorbed by the banks and risk is covered by
ECGC.
 Banks may not put towards realization of dues against
outstanding export bills.
EXIM Bank
 Export–Import Bank of India is the premier export finance
institution in India, established in 1982 under Export-Import
Bank of India Act 1981.
 Exim Bank of India has been both a catalyst and a key player in
the promotion of cross border trade and investment.
 Commencing operations as a purveyor of export credit, like
other export credit agencies in the world,
 Exim Bank plays a major role in partnering Indian industries,
particularly the Small and Medium Enterprises, in
their globalisation efforts, through a wide range of products and
services offered at all stages of the business cycle,
 Starting from import of technology and export product
development to export production, export marketing, pre-
shipment and post-shipment and overseas investment
Objectives of EXIM
 To provide financial Assistance
 To function as a principal financial institution for
coordinating the functioning of all the financial institution
engaged in financing imports and exports.
 Promoting international trade.
 Help Indian exporters to become internationally competitive
Direct and Indirect Financial
Assistance by EXIM
 Pre and Post Shipment Finance greater than 180 days.
 Finance to SME’s
 Term finance and guarantees to 100% export oriented units
 Finance to Indian exporters for production, marketing etc
 Forfeiting facility
 Finances the Joint Ventures of Indian and Foreign Companies
 Indirect
 It issues guarantees for Overseas Projects
 Gives rules and Regulations for credit giving
 Refinance facility for overseas bank
 Rediscounts export bills- Not more than 90 days
 Offers Overseas buyer credit to foreign entities for import of
eligible goods
 Training activities with UNCTAD ( United nations conference
on trade and development)
 Technical and advisory services to Indian exporters about
different foreign markets
 Assist Indian companies to conduct research regarding export
market.
DIGITAL INDIA
 EXIM launched portal for providing information on financial
products available to facilitate exports and delivering trade
related information.
 Digital India Campaign by PM
 Bank Launched online portal ‘ EXIM Mitra’- Friend for
importers and Exporters
 EXIM Mitra will provide preliminary help to a large number of
exporter and importer who may not have access information.
 Act as a gateway to identify potential global markets and
products, estimate freight, global rules , various credit and
insurance facilities