Gamut of International Banking BusinessFacilitating and / or financing Cross BorderTransactions relating to:- Trade (Exports / Imports)- Private Remittances (Inward / Outward), including those on account of NRIs
Balance of Payments Current Account:• Trade Account – Merchandise Export / Import• Invisibles – inward / outward remittances, including receipts / payments o/a of services export / import Current A/C - deficit/surplus Capital Account: Inflow / outflow of Capital / Investments (FDIs / FIIs) Capital A/C surplus / deficit Reserves: net increase / decrease
Currency inflow/outflow EXPORTS IMPORTS INVISIBLE TRADE DEFICIT RECEIPTS INVISIBLE PAYMENTS CA DEFICIT CAPITAL CAPITAL PAYMENTS RECEIPTS GROWTH IN RESERVES
CURRENT ACCOUNT RECEIPTS PAYMENTS• SUPPLY OF FOREX • DEMAND FOR FOREX• For export of GOODS • For import of GOODS• For export of SERVICES • For import of• RECEIPTS FROM SERVICES PROFITS, DIVIDENDS, • PAYMENT OF PROFITS, INTEREST, ROYALTIES, DIVIDENDS, INTEREST, ETC EARNED ABROAD ROYALTIES, ETC TO FOREIGN COUNTRIES
CAPITAL ACCOUNTINFLOWS FROM OUTFLOWS TOFOREIGN COUNTRIES FOREIGN COUNTRIES SUPPLY OF FOREX DEMAND FOR FOREX• BORROWINGS • LENDINGS• DIRECT INVESTMENT • DIRECT INVESTMENT• PORTFOLIO • PORTFOLIO INVESTMENT INVESTMENT
FOREX BUSINESS• Each country has a Central Bank / Agency.• It regulates inflows and outflows of FCs.• Each country has certain regulations about who is authorised to convert the currencies.• In India RBI has the regulatory powers under FEMA. It authorises commercial bank branches to conduct foreign exchange business. - Authorised dealers in Foreign Exchange.
EXCHANGE RATE MECHANISMEXCHANGE RATE IS THE RATE OFCONVERSION OF ONE CURRENCY INTERMS OF ANOTHER CURRENCY
EXCHANGE RATE MECHANISM• CONVERSION CAN BE ON ACCOUNT OF: EXPORT RECEIVABLES IMPORT PAYABLES DISBURSAL OF FOREX LOAN REPAYMENT OF FOREX LOAN FOREIGN INVESTMENT
WHAT FACTORS AFFECT EXCHANGE RATE MOVEMENTS?• POLITCAL• ECONOMIC• SPECULATIVE
Scope of FEMA• Regulations Applicable to Resident Individuals• Regulations Applicable to Resident Corporates Entities• Regulations Applicable to Non- Resident Individuals• Regulations Applicable to Non- Resident Corporates & Other Entities
Declaration Under FEMA, Section 10(5)• Three Types of Declarations:• For Regular Transactions: Take the Full Declaration.• For Form A2 Transactions : Total forex purchased/remitted during calendar year and purpose.• For Regular Corporates: One time declaration : ‘I/We declare that all foreign exchange transactions as may be entrusted by me/us to the bank from time to time will be in strict conformity with FEMA.”
FEMA Transactions• Current Account Transactions - Sec.5 (regulated by GOI in consultation with RBI)• Capital Account Transactions – Sec.6 (regulated by RBI in consultation with GOI) (The Regulations for transfer of assets outside India by a person whether resident in India or not are given in the Notifications No. FEMA 13/2000-RB and FEMA 21/2000-RB of May 3, 2000.)
Current Account Transactions• Generally, current account transactions are those which are routinely undertaken in connection with day to day affairs of business or in our own life style;- these transactions should not create an asset or liability situation. - Sec.2(j) defines Current Account transactions as those which are not Capital Account transactions
Examples Of Current Account Transactions specified in Sch. III (cont.)• Remittance for maintenance of close relatives abroad,i) Up to net salary (after deduction of taxes, contribution to provident fund and other deductions) of a person who is resident but not permanently resident in India, and who – (a) is a citizen of a foreign State other than Pakistan; (b) is a citizen of India, who is on deputation to the office or branch or subsidiary or joint venture in India of such foreign companyii) Up to USD 100,000 per year, per recipient, in all other cases (a person resident in India on account of his employment or deputation of a specific duration or for a specific job or assignment – the duration of which does not exceed 3 years, is a resident but not permanently resident )
Sale of exchange• Form – A2.• Simplified application cum declaration.• Self declaration – onus on applicant.• Business visit includes attending conference and specialised training.• Payment in rupees for sale of exchange by bank.
Sale of foreign exchange for travel purpose• Out of overall forex sold to a traveller, exchange in the form of foreign currency notes and coins may be sold up to the following limits - to travellers to countries other than Iraq, Libya, Iran, Russian Federation and other republics of CIS – not exceeding USD 3000 or its equivalent - to travellers proceeding to Iraq or Libya – not exceeding USD 5000 or its equivalent - travellers proceeding to Iran, Russian Federation and other Republics of Commonwealth of Independent States – full exchange may be released
Sale of foreign exchange for travel purpose• Authorised Dealers may accept payment in cash up to Rs. 50,000 (Rupees fifty thousand only) against sale of foreign exchange for travel abroad (for private visit or for any other purpose). Wherever the sale of foreign exchange exceeds the amount equivalent to Rs.50,000, the payment must be received only by• (i) a crossed cheque drawn on the applicant’s bank account, or• (ii) crossed cheque drawn on the bank account of the firm/company• sponsoring the visit of the applicant, or• (iii) Banker’s Cheque / Pay Order / Demand Draft or
Sale of foreign exchange for travel purpose (cont.)• (iv) Debit / credit / prepaid cards provided• a) KYC/AML guidelines are complied with• b) sale of foreign currency / issue of foreign currency TCs is within the limits (credit / prepaid cards) prescribed by the bank and• c) the purchaser of foreign currency / foreign currency TCs and the credit / debit / prepaid card holder is one and the same person.• Note: Where the rupee equivalent of foreign exchange drawn exceeds Rs 50,000 either for any single drawal or more than one drawal reckoned together for a single journey/visit, it should be paid by cheque or draft.
Surrender of exchange Unspent foreign exchange brought back to India should be surrendered within 180 days from date of return. Exchange so brought back can be used for subsequent trips abroad. Returning traveller also permitted to retain FCTCs & FCNs up to USD 2000 and foreign coins without limit.• Returning traveler may deposit unspent forex in his RFC(D) A/C
Trade Payment Methods• Cash (Advance Payments)• Clean / Documentary Collection• Open Account• Letter of Credit / Documentary Credit• Standby Letter of Credit
THE ADVANCE PAYMENT CHARACTERISTICS• made at the confirmation of the order or signing of the international sales contract (in advance).• the risk is taken by the importer / purchaser• Non-requirement of any shipping document or shipment proof at the time of making the remittance.
Advance Payment• Advance payment for Imports.• Advance payment for Exports.• (Both need to comply with FEMA provisions)
COLLECTION• Definition: Handling by banks of documents in accordance with instructions received.• Governed by: Uniform Rules for Collection (URC), ICC publication URC 522• the risk is taken by seller / exporter.
Letter of Credit An arrangement by means of which abank (issuing bank) acting at therequest of a customer, or on its ownbehalf (applicant) undertakes to pay to a third party (beneficiary) a pre-determined amount by a given dateaccording to agreed stipulations andagainst presentation of stipulateddocuments
LETTER OF CREDITUCPDC – 600 Edition effective from1st July 2007Credit means any arrangement that isirrevocable and thereby constitutes adefinite undertaking of the issuing bankto honour a complying presentation.
Letter of Credit• LC- provides a means of payment for goods & services supplied by a seller to a buyer-• L/C- commitment or promise from Buyer’s Bank to pay to Seller once seller has met all the terms and conditions of L/C• LC - ensures payment to seller (and delivery of goods/services to buyer?)• L/C assures payment against presentation of stipulated documents/compliance with agreed stipulations
Letters of Credit Facilitates trade – domestic & international Helps seller to get immediate payment though credit is extended by him (suppliers’ credit) Helps in reducing W/C requirement for buyer Also helps in reducing immediate outlay of funds for banks Bank lends its creditworthiness to transaction for which it charges the applicant
Standby Letters of Credit• SLC- commitment/promise of Buyer’s Bank to pay seller once seller has met all terms and conditions of SLC• SLC- guarantee of payment from Buyer’s Bank only if Buyer defaults on payment• To invoke Buyer Bank’s commitment under SLC, Seller would be required to present to Issuing Bank sight draft / written statement / other documents as specified in SLC, certifying / evidencing that Buyer has failed to make payment on the shipment secured by SLC
Difference between LC and SLC• LC covers a performance situation• SLC covers non-performance situation
Letter of Credit• Three main contracts underlying LC - Sale Contract between Buyer & Seller - Application-cum-Guarantee between Applicant(Buyer) and Issuing Bank - LC itself (contract between Issuing Bank and Beneficiary/Seller) ( LC independent of other two contracts)
Parties to a Letter of Credit• Applicant (Buyer)• Issuing Bank (opening bank)• Beneficiary (Seller)• Advising Bank• Confirming Bank• Negotiating Bank / Paying Bank• Reimbursing Bank• Second Beneficiary
LC MechanismCodified rules governing LCtransactions are contained in ICCPublication No. 600- UniformCustoms & Practices of DocumentaryCredits.
Mechanics of Documentar y Cr edit CONTRACT GOODS GOODS SHIPPINGIMPORTER EXPORTER DOCS COMPANY DOCS OPEN CREDITOPENING DOCUMENTS BANK DOCUMENTS ADVISING/ NEGOTIATING PAYMENT BANK PAYMENT
International Banking Operations• Establishment of Correspondent Relations with overseas banks• Establishing presence abroad by way of: - overseas branches, representative offices, overseas subsidiaries, etc to capture business available from the Indian diaspora (NRIs / PIOs), as also the business of Indian companies operating abroad.
Organistional Structure of SBI for Managing / Growing International Banking Business
EXPORT FINANCEPRE-SHIPMENT CREDITPre shipment finance or Export PackingCredit (EPC) – extended as working capitalfor purchase of raw materials, processing,packing, transportation and warehousing.POST-SHIPMENT CREDITPost shipment finance - extended after shipment tobridge the time lag between the shipment of goodsand realization of proceeds