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Key terms done


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Key terms done

  1. 1. 1Chapter 8Key Terminologies
  2. 2. You Must Know…… Correspondent Banking NOSTRO and VOSTRO Accounts SWIFT CHIPS CHAPS FEDWIRE Letter of Credit and International Remittances2
  3. 3. Correspondent Banking A Correspondent Banking relationship involves theprovision of banking services by one financialinstitution (a Correspondence bank) to anotherfinancial institution (Correspondent Banking Client) In which the financial institution carry on activities orbusiness at or through permanent establishments indifferent countries It is also possible for one bank to open aCorrespondence Account with another bank thatalready has an existing Correspondent facility3
  4. 4. Contd…. The banking services provided by CorrespondentBank may involve provision of cash managementservices, international fund transfers, checkclearing, foreign exchange services, loans andletters of credit Correspondent banking as the banking services –mainly payments, cash management and tradeservices - provided by banks to customers via otherbanks.How this relationship works in real life???? 4
  5. 5. NOSTRO and VOSTRO Accounts Both NOSTRO and VOSTRO account are normallyused in the context of foreign exchange transactionsdone by the banks or during currency settlement.Let’s look at what they both mean. VOSTRO is an Italian word – meaning – Yours NOSTRO is an Italian word – meaning – Ours5
  6. 6. Contd…. VOSTRO Account – It is the account which isheld by a foreign bank with a local bank, so ifBank of America maintains an account with StateBank of India it will be a VOSTRO account forState Bank of India. Account held by a foreign bank in a domesticbank is called VOSTRO account. A VOSTRO isour account of your money, held by US. AVOSTRO account with a credit balance (i.e. adeposit) is a liability, and a VOSTRO with a debitbalance (a loan) is an asset. 6
  7. 7. Contd…. For example Bank A (Barclays Bank of UK)opening an account in Bank B (ICICI Bank ofIndia), this is VOSTRO account for Bank B(ICICI Bank of India). NOSTRO Account – It is the overseas accountwhich is held by the domestic bank in the foreignbank or with the own foreign branch of the bank.For example the account held by State Bank ofIndia with bank of America in New York is aNOSTRO account of the State Bank of India7
  8. 8. Contd…. Account held by a particular domestic bank in aforeign bank is called NOSTRO account. ANOSTRO is our account of our money, held byyou. A bank counts a NOSTRO account with a creditbalance as a cash asset in its balance sheet. From the above one can see that the account which isNOSTRO for one bank is VOSTRO for another sowhen SBI opens a NOSTRO account with Bank ofAmerica, it is a VOSTRO account for them and viceversa.8
  9. 9. Contd…. Here in the above example given in VOSTROaccount the same account is a NOSTRO accountfor Bank A (Barclays Bank of UK), or if Bank B(ICICI Bank of India) opens an account in Bank A(Barclays Bank of UK) then that account is aNOSTRO account for Bank B (ICICI Bank ofIndia). NOSTRO accounts are usually in thecurrency of the foreign country. This allows foreasy cash management because currency doesntneed to be converted.9
  10. 10. What is SWIFT??? It stands for Society for the Worldwide InterbankFinancial Telecommunications Founded in Brussels in 1973, is a co-operativeorganization dedicated to the promotion anddevelopment of standardized global interactivity forfinancial transactions. More than 10,000 financial institutions andcorporations in 212 countries every day to exchangemillions of standardised financial messages. Thisactivity involves the secure exchange of proprietarydata while ensuring its confidentiality and integrity. 10
  11. 11. Contd…. SWIFT enables its customers to automate andstandardise financial transactions, thereby loweringcosts, reducing operational risk and eliminatinginefficiencies from their operations SWIFT is organized into three regions – theAmericas, Asia Pacific, and EMEA (Europe, MiddleEast and Africa). SWIFT provides a service for financial messages,such as letters of credit, payments, and securitiestransactions, between member banks worldwide.11
  12. 12. Contd…. SWIFTs essential function is to deliver thesemessages quickly and securely -- both of which areprime considerations for financial matters.SWIFT Code??? Bank swift code which is also referred to as the BICcode is a unique code that is used to recognizefinancial and non-financial institutions. The bankswift code comes with eight or eleven characters thatthrow light on details regarding the bank code,country code, location code, and the branch code.12
  13. 13. Contd…. The first four letters of a eleven digit bank swiftcode shows bank code, followed by another twodigits that identifies the country code, as the nexttwo letters help identify the location of the financialinstitution. The last three letters tell us more aboutthe branch related to a financial institution, which isbut an optional code of letters that come along withthe other details of a financial institution. BKTRUS33 DEUTGB2L13
  14. 14. Contd…. Businesses that plan to enter into transactions withclients located in other countries should take note ofthe bank swift code to enable smooth internationaltransactions. As an inherent part of internationaltransactions, bank swift code is used to transfermoney between banks, particularly for telegraphictransfers and wire transfers. This code is also used bybanks across the globe to exchange messagesbetween them.
  15. 15. CHIPS CHIPS stands for Clearing House InterbankPayments System CHIPS is the largest private-sector U.S.-dollar funds-transfer system in the world. In 2012, CHIPS clearedand settled an average of $1.5 trillion in cross-borderand domestic payments daily. CHIPS operates on aglobal business day and utilizes a sophisticatedliquidity savings mechanism to provide fast, finalpayments while maximizing liquidity efficiency forparticipating banks.15
  16. 16. Contd…. CHIPS sets the industry standard for resiliency,reliability, and innovation in funds transfers. Leadingbanks worldwide, as well as their correspondents andcustomers, find CHIPS a trusted partner in the U.S.-dollar clearing and settlement services.16
  17. 17. How it Works..???17
  18. 18. CHAPS CHAPS stands for Clearing House AutomatedPayment System CHAPS is the only UK payment system thatguarantees real-time finality, of any value, in ‘CentralBank money’ as each payment instruction settles. CHAPS continues to be one of the largest Real-TimeGross Settlement systems (RTGS) in the world. As of July 2011 the total value processed since thestart of CHAPS exceeded one quadrillion pounds18
  19. 19. Contd…. It is a sterling payments scheme that processes andsettles both systemically important and time-dependent payments. The scheme is run byCHAPS Clearing Company, which manages day-to-day operations. Launched on 9th February 1984, the CHAPSscheme provides a guaranteed same-day service forthe bank-to-bank transmission of sterling-denominated payments.19
  20. 20. Contd…. Since 1996, CHAPS has used an enhanced Real-TimeGross Settlement (RTGS) system where eachindividual payment is settled in real-time across itsMembers’ settlement accounts at the Bank ofEngland. A CHAPS payment is an electronic bank-to-banksame-day value payment made UK sterling, generallyused for high-value interbank transactions.20
  21. 21. Contd….Banks themselves use CHAPS to move money aroundthe financial system, but it is also used regularly: For delivery of domestic and international wholesalepayments i.e. Money Market / Foreign Exchange(FX) transactions. For business-to-business payments. By solicitors / licensed conveyancers to transfer thepurchase price of a house between the bank accounts ofthose involved. By individuals buying or selling a high-value item, suchas a house or car. 21
  22. 22. FEDWIRE The Federal Reserve Banks operate three wholesalepayment services: The Fedwire Funds Service: which is a real-timegross settlement system to settle funds electronicallybetween banks; The Fedwire Securities Service: which providesissuance, settlement and transfer services for U.S.Treasury securities and other government-relatedsecurities and22
  23. 23. Contd…. The National Settlement Service, which is amultilateral settlement service used by clearinghouses,financial exchanges, and other clearing and settlementgroups. An electronic transfer system developed andmaintained by the Federal Reserve System. These services date back to the early 1900s when theFederal Reserve Banks began usingtelecommunications to transfer funds betweenaccounts maintained in different Federal ReserveDistricts. 23
  24. 24. Contd…. The Fedwire services play a key role in the nation’spayments mechanism and enable depositoryinstitutions, the U.S. Treasury and other governmentagencies to transfer funds and book-entry securitiesnationwide.24
  25. 25. Contd…. Depository institutions use Fedwire mainly to movebalances to correspondent banks and to send funds toother institutions on behalf of customers. Transferson behalf of bank customers include funds used inthe purchase or sale of government securities,deposits, and other large, time-sensitive payments.The Treasury and other federal agencies use Fedwireextensively to disburse and collect funds.25
  26. 26. Contd…. In a typical funds transfer, an individual or a businessinstructs its bank to send a funds transfer. The sendingbank debits the senders account and initiates aFEDWIRE funds transfer. The Federal Reserve, in turn,debits the account of the sending bank and credits theaccount of the receiving bank; the Fed notifies thereceiving bank about the transfer. The receiving bankcredits the recipients account and notifies the recipientof the receipt of the funds. The transfer is final when thefunds are received. Funds can be used by the recipientimmediately thereafter.26
  27. 27. Letter of CreditRefer the Material Provided27
  28. 28. International Remittance In this globalizing world, migration of people fromone country to another for employment opportunitieshas become a common phenomenon. Dominant migration corridors have been formedbetween various countries/regions. This is primarily due to the socio-economicconditions prevailing in the migrants’ countries oforigin and destination.28Remittance is the act of transmitting money to adistant location to fulfil an obligation
  29. 29. Contd…. An International Remittance business may follow theconventional banking model or any of the non-banking models.1. Conventional Banking Model2. Non-Banking Channels3. Emerging Non-Banking Channels29
  30. 30. 1. Conventional Banking Model It is end-to-end remittance transaction with thefollowing parties: Remitter’s Bank - the bank where the remitter hasan account that is debited for transferring money tothe beneficiary Beneficiary’s Bank - the bank where the beneficiaryof the remittance has an account that is credited forthe remittance money received30
  31. 31. Contd…. Correspondent Bank (only in cases where theabove-mentioned entities do not have a directbusiness tie-up) - an intermediary bank which hasassociated with various banks globally, throughwhich remittance transactions are routed The generic process involved in a remittancetransaction based on a Nostro account model.31
  32. 32. Contd…(NOSTRO-based Setup)32
  33. 33. 2. Non-Banking Channels Non-banking players play a vital role in the remittancespace and have a larger share in the Global Remittancebusiness than conventional banks. These entitiesoperate in various forms: Money Transfer Operators (MTO) Exchange Houses33
  34. 34. Contd…What is Money Transfer Operators??? Western Union and Money Gram have a network ofagents across the globe and serve as non-bankremittance channels. The remitter can visit an MTO outlet and pay cash inforeign currency to send money to any part of the globewhere the MTO’s agent is present. The receiver can visit the MTO agent at his locationand collect the money in local currency.34
  35. 35. Contd…(MTO Model)35
  36. 36. Contd…What is Exchange Houses??? Exchange Houses are extensively used forremittances from the Middle East. Unlike the bankingchannel, this channel is based on Vostro accountsi.e. the accounts maintained by exchange houseswith various banks in the beneficiary countries. Theseaccounts are pre-funded by the exchange houses. Key Steps……36
  37. 37. Contd…Step 1 The remitter deposits the remittance money inthe overseas currency in cash at the Exchange Housecounter.Step 2 The exchange rate and the transaction fee arecommunicated and confirmed over the counter.Step 3 The beneficiary account details are provided bythe remitter.Step 4 The exchange house instructs the BeneficiaryBank with whom it has a tie-up for transferring therequisite amount in the beneficiary country’s localcurrency. 37
  38. 38. Contd…(Exchange House Model)38
  39. 39. 3. Emerging Non-Banking ChannelsOnline Channels Which provide platforms encompassing the entireremittance process, are a recent development. Theyhave created global networks with banks/FIs inorigination and destination countries. From thecomfort of his home, the remitter can initiate aremittance request by registering himself on theonline entity’s website and furnishing his and thebeneficiary’s bank account details.39
  40. 40. Contd…40
  41. 41. Contd…White Label Platform Providers A White Label Platform provider is a variant of theonline platform channel, wherein a third party enablesbanks and FIs operating in the remittance corridors tolaunch remittance services by providing thefollowing:41
  42. 42. Contd…42
  43. 43. Challenges faced…. Transaction cost Grey Market Reconciliation of the remittance transactions Revenue sharing agreement43