Brief Introduction about Foreign Exchange, Administrative Set up, Correspondent Arrangement, Types of Accounts

2. FOREIGN TRADE
International trade
Residents of two different countries
Set of regulations and currency
Differences in nationality

3. CONTI…..
Important problems in foreign trade:
1. Different countries have different monetary units
2. Restriction imposed on imports and exports of goods
3. Restriction imposed on payments
4. Differences in legal practices in different countries

4. FOREIGN EXCHANGE
Mechanism to convert countries currency to carry on trade
Example:
EXPORTS
Amerex of New York Indimp, Mumbai
(US Dollars) (Indian Rupees)

5. CONTI…..
Conversions are done by banks (deals in foreign exchange)
Maintains stocks of foreign currencies (form of balances abroad)
Example:
Payment
Indian Bank Bank of America
Dollar Balances

6. EXCHANGE RATE
Rate at which conversion takes place
Example:
Indian Bank
Indian Rupee US Dollars
USD1 = INR 60
Quotations in the foreign market

7. CONTI…
Forces of demand and supply
Foreign exchange market

8. FOREIGN EXCHANGE AS STOCK
Balances held abroad
Stocks of foreign currencies and foreign assets
FEMAAct, 1999 defines:
“Foreign Exchange means Foreign currency and includes:
1. deposits, credits and balances payable
2. Drafts, traveler cheques, letters of credit or bills of exchange drawn in Indian currency payable in foreign
currency
3. Drafts, travelers cheques, letter of credit or bills of exchange drawn by person outside Indian payable in Indian
currency

9. FOREIGN EXCHANGE MARKET
Banks, financial institutions and other institutions constitute a market
Quotation of rates of foreign exchange

10. ADMINISTRATION OF FOREIGN
EXCHANGE
FEMA
CG
RBI
FEDAI
CATEGORY
III
AUTHORISED
PERSONS
AUTHORISED
DEALERS
CATEGORY
I
CATEGORY
II
AUTHORISED
MONEY
CHANGERS
RESTRICTED
FULL

11. CONTI…
Sec 46, empowers Central Government to makes rules
Sec 47, empowers RBI to make regulations
Sec 41, provides Central Government may give direction to RBI
Ultimately RBI has charged with powers and responsibilities to administer foreign exchange in
India.

12. AUTHORISED PERSONS
RBI has the authority to administer Foreign exchange
Large number of importers and exporters need
Sec 10, enables RBI to authorize any persons as Authorised Persons
Authorised persons should comply with the general, special directions or orders of RBI
Declaration and information from customers
Refusal of transaction should be made in writing

13. AUTHORISED DEALERS
AD are banks, financial institutions and other institutions authorized by RBI
He must comply with RBI directions and instructions
Earlier FERA, directions were laid down in AD (MA series) circulars in Exchange Control
Manual
Now FEMA, along with directions in exchange control manual few more amendments and in AP
(DIR series) circular

14. CONTI….
Sec 10, he must also obtain declaration and information from customers
During FERA, documents were collected which is stated in Exchange Control Manual
Now with FEMA, these information or documentations collected on the basis of transaction are
recorded for RBI verification
Formats – both RBI and bank has
Charging of commission, quotation of rates, AD should comply with rules of FEDAI

15. AUTHORISED DEALER –
CATEGORY I
Banks those deal in foreign exchange
Current and capital account transactions
Exporter or importer route his transactions
Major customers – exporters, importers or those making personal remittances

16. AUTHORISED DEALERS –
CATEGORY II
Upgraded full fledged money changers, cooperative banks, regional rural banks and others
Purchase and sale of foreign exchange for private and business purposes
Non trade related current account transactions

17. AUTHORISED DEALER –
CATEGORY III
Selected financial institutions and other institutions
Transactions incidental to foreign exchange

18. AUTHORISED MONEY CHANGERS
Certain established firms, hotels and other organizations
Encashment of foreign currency for tourists
Two types – full fledged and restricted money changers

19. FULL FLEDGED MONEY
CHANGERS
Departments of posts, urban cooperative banks and other recognized institutions
Purchase and sale transaction with the public
Private and business visits abroad

20. RESTRICTED MONEY CHANGERS
Only purchase of foreign currency, notes, coins and travelers cheques subject to the condition
Restricted money changers are discontinued now by RBI
Now Authorised dealers and full fledged money changers can enter into agency or franchise
agreements to carry on Restricted money changers

21. FEDAI
Established in 1958
Association of all authorized dealers
Headquarters – Mumbai
Local offices – Bengaluru, Kolkata, Chennai and New Delhi
Affairs of FEDAI

22. FUNCTIONS OF FEDAI
To frame rules
To coordinate with RBI
To circulate information

23. FUNCTIONS OF FOREIGN
EXCHANGE DEPARTMENT
Financing Exports
Financing Imports
Remittance Facilities
Dealings in Foreign Exchange
Furnishing Credit Information

24. FINANCING EXPORTS
Needs of the exporter
Packing credit or pre-shipment credit
Shipping the goods
Post – shipment finance
Services rendered by banks to exporters
Financial accommodation
Export bills

25. FINANCING IMPORTS
Letter of credit issued by banks
Financed by bank
Deferred payment guarantees
Importing of goods into India

26. REMITTANCE FACILITIES
Importer PAY Exporter
(India) (Overseas)
Exporter RECEIVE Importer
(India) (Overseas)
Example: magazine subscription abroad, remit funds for maintenance of his family in India etc.
 Inward remittance and Outward remittance
Credit instruments
Non resident accounts

27. DEALINGS IN FOREIGN
EXCHANGE
Buying and selling of foreign exchange
Sufficient stocks of foreign exchange
Example:
Foreign DD (pound-sterling) issued by bank would be payable by the Bank in London
Quotation of exchange rates – rates prevailing in interbank or international market and the banks
margin of profit etc.
Dealer

28. FURNISHING CREDIT
INFORMATION
Network of correspondent relations with banks abroad
Information – credit report, market conditions, exchange regulations, etc.
Other information – currency used in the transaction, avoidance of exchange risk etc.
Periodic information

29. CORRESPONDENT ARRANGEMENT
One bank acts as an agent of the other bank
Indian bank American bank
Utilizing the services of American bank for transaction in USA and in US dollars
Signature of the authorized officials and letters on behalf of the respective banks

30. SERVICES UNDER CR
1. Collection of bills, cheques etc.
2. Issue of DD, mail transfers, telegraphic transfers and traveler’s cheques
3. Arrangement for reimbursement on letter of credit issued by banks
4. Advising or confirming and amending the letters of credit
5. Sale and purchase of foreign currencies
6. Granting or guaranteeing of loans and overdrafts
7. Furnishing of credit information such as report on business houses, market reports etc.

31. ACCOUNT RELATIONSHIP
Volume of transactions and direction of its flow
Example: Indian bank with America for dollar account and middle east bank with India for Indian
rupee account
Settlement of transactions
Example: Indian bank maintains account with Bank of America, New York
Indian bank issues a DD on New York, Bank of America will debit the account of
Indian Bank
Bank of America issues DD, credit the Indian bank account with it

32. FOREIGN CURRENCY ACCOUNTS
Banks maintain accounts with other banks abroad
For example, India may maintain account with banks abroad and vice versa.
3 types of foreign currency accounts:
a. Nostro Account
b. Vostro Account
c. Loro Account

33. NOSTRO ACCOUNT
Account with other banks
For example, a. Indian Bank maintain account with Lloyds bank, London (Pound- sterling)
b. Indian Bank maintains account with Bank of America, US (US Dollars)
Indian Bank refers this account as Nostro account (“our account with you”)
Indian bank maintains account in foreign currency abroad
Example: Indian bank issues DD on London payable in pound sterling
Lloyds bank debits Indian bank account.
Similarly, when Lloyds bank issues bill for purchase or collection to Indian bank, Lloyds bank collects and credits the
account of the Indian bank with the proceeds.

34. VOSTRO ACCOUNT
Bank with which account is maintained
For Example: Foreign Bank may open rupee account with an Indian Bank
Foreign bank maintaining account with Indian bank is called Vostro Account (“your account with us”)
Example: Middle East Bank open an account with Indian bank
Non- resident bank accounts
For example: Import made from Sri Lanka. Proceeds will be credit in Vostro account of the Sri
Lankan bank with Indian Bank
Balances in Vostro account can be used for paying exports from India to that country.

35. LORO ACCOUNT
Account is referred by banks other than account maintaining bank and bank with which account
is maintained.
Third party accounts
Example: People Bank of India ACCOUNT Lloyds bank, London
Janata bank of India likes to refer to this account while corresponding with Lloyds
Bank.
“Their account with you”

36. THANK YOU 