General Bank Management CAIIB International Banking Module A PART-I Foreign Exchange

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General Bank Management (CAIIB) International Banking (Module A) – PART-I Foreign Exchange R N Hirve Chief Manager International Division Mumbai 29th November 2008

Contents of Module A RBI and trade control in India ICC, FEDAI, ECGC, EXIM Bank# Exchange rates Risk administration and nuts and bolts of derivatives# Documentary letters of credit Facilities for exporters and importers# Correspondent Banking

EXCHANGE CONTROL IN INDIA FEMA 1999-W.E.F. 1 ST JUNE 2000 ORIGIN IN DEFENSE OF INDIA RULES (DIR) 1935 CONTROL TO CONSERVE FEX DUE TO SEVERE CONSTRAINTS ON FOREX RESERVES DUE TO II ND WORLD WAR 23 MAR 1947 THESE RULES BECAME FERA 1947 MODIFIED/AMENDED-FERA 1973 W.E.F 1.1.1974 FURTHER RALAXATIONS SINCE 1994. FCRA 1976 - [permission from Min.Of Home Affairs to get FC – HC/DC Judge, Newspaper Editor, Publisher, Columnist, Printer, Political gathering pioneer, Office Bearer, Candidate for decision, Charitable Trust]

FEMA (49 Sections) Plays a part of facilitator which directs & oversees of FE exchanges Civil Act.- indictment to demonstrate blame NRI status Penalty Regulation, Discretion & Permission FERA (81 areas) Acted as controller for Conservation of FE Criminal Act-charged to demonstrate honesty NRI status not good with IT Act Penalty & arraignment Only control FEMA V/S FERA

FOREX TRANSACTIONS 4 D – TRADE CONTROL, EXCHANGE CONTROL, BANK'S INTERNAL GUIDELINES, KYC IMPORTANT SOURCE OF OTHER INCOME FOR BANKS – INTEREST/COMMISSION/EXCHANGE IMPORTS EXPORTS INWARD/OUTWARD REMITTANCES FC A/CS: EEFC/RFC/ESCROW/FCNR-B FCLS FOREX DEALING/TRADING OPERATIONS Receipt/Payment/Borrowing/Lending in FX

FEMA 1999 How to get FX : Exports + IRS + Borrowings + Inbound Investments How to dispatch FX: Imports + ORS + Lending + Outbound Investments

Capital Account Residents Creation of Assets/Liab. Outside INDIA Non Residents Creation of Assets/Liab. In INDIA

Capital A/C ( Contd.) Inflow - Equity Debt &Assistance ECB/ADR/GDR/FDI/FII/NR INV.EXT..assistance to INDIA Out stream Repayment of loans,Repatriation of capital,Foreign speculations by Residents./EXT. Help by INDIA

Current A/C ( Full convertible since 19/08/1994-Trade a/c streams, Misc installments, yearly gatherings intt, profit & benefit) Inflow Export of merchandise & administrations – travel, protection, speculation , transport salary, pay to representatives and so on Outflow Import of products & administrations travel, protection, venture , transport pay, remuneration to workers and so forth

CURRENT A/C TRANSACTIONS SCHDULE I-Prohibited Eg. Settlement of lottery rewards, Racing, buy of lottery tickets and so on. SCHDULE II-Permitted by Ministry/Deptt .Eg. Social visits HRD-Dept of Education & Culture , Remittance of cargo of vessel sanctioned by a PSU-Min of Surface Transport and so on SCHDULE III - Permitted by RBI Eg. Blessing/Donation surpassing USD 5000, arrival of trade in overabundance of USD 10,000 or eq. in one budgetary year( April-March) [i/o one schedule year] for at least one visits to any nation with the exception of Nepal & Bhutan, and so forth

BOT & BOP BOT Current a/c inflows – surges BOP Current a/c + Capital a/c

BALANCE OF TRADE

Growing Foreign Exchange Reserves Foreign Exchange Reserves (US$ billion) Exchange Rate (Rs/US$)

RBI - IECD/FED/DBOD FEMA 99 Inflow & Outflow of F/C Maintenance of FC stores Issue of permit to A.D. Review & Supervision Monitoring – R returns, XOS,BEF and so forth Master Circulars AP (DIR) Circulars Intt. Rates on Export Credit

Guidelines & Rules for FX Business (FEDAI Rule book) Training of Bk faculty in territories of FX Business Accreditation of Forex Brokers Code of Ethics & Conduct for Forex Dealers & Brokers Advising/helping part banks in settling issues/matters in their dealings Code on Bank's Commitment to Customers (CBCC)- Intt for deferral in installment of Inward settlement past 10 days @ 2% over Savings rate ( USD 5000/USD 5000 or more) Represent part puts money on Govt/RBI/different bodies Accounting principles/Closing Rates/Revaluation of Mirror a/cs & extraordinary cont

CONCERNED MINISTRIES Ministry of Commerce Inflow and surge of products & Services (DGFT-FT Policy) Ministry of Finance Inflow and outpouring of F/C ( Customs/Excise/ED/RBI/Exim Bank/ECGC/Banks/0FIs) Ministry of I.T. Accreditation of programming units Promotion of programming fares/STP/HTP

Export Credit Guarantee Corporation of India Ltd. (ECGC) It was set up for the advancement of fares in the year 1957. To shield the exporters from any monetary misfortune. Essential objective of ECGC : To bolster & reinforce the fare advancement drive in India by giving a scope of credit hazard protection spreads to exporters against misfortune in fare of merchandise and administration likewise by offering ensure spreads to banks and money related establishments to empower exporters to acquire better offices from them.

ECGC Credit Guarantee cover WTPCG-in f/o banks WTPSG-in f/o banks POLICIES-in f/o exporters Status Report on abroad purchasers

Other market players Insurance organizations Transporters Chamber of trade Exporters/Importers

Interest Rates PCFC:LIBOR + 100 BP PC:BPLR-2.5% Upto 270 days ECB: 3 to 5 yrs: LIBOR + 300 bps more than 5 yrs+500bps FCNR enthusiasm roof : LIBOR/SWAP rates winning on the last working day of the earlier month in addition to 100 premise points** w.e.f. 15 th Nov 2008 FCNR now in 6 monetary forms USD/GBP/EUR/JPY/AUD/CAD* Max 5 years* (* Ref DBOD cir 26/07/2005) NRE financing cost roof: LIBOR/SWAP RATES FOR USD of comparing developments winning on the last working day of the earlier month in addition to 175 bps w.e.f 15 th Nov 2008 – ** FEDAI would cite/show these rates fm FEB 2006 –Ref DBOD round dtd 8 Feb 2006 NRE SAVINGS: At the rate pertinent to local store rates w.e.f. 17 Nov 2005

Correspondent Banking Relationship to be built up by endorsement of the Board or appointed by Board headed by Chairman/CEO. To be set before the Board in next Board meeting for post facto endorsement To comprehend insights about Bank's administration, Major Business Activity, level of AML consistence, motivation behind opening record, administrative/supervisory casing work in the nation of journalist bank and so on

USA PATRIOT ACT & Correspondent Banking Guidelines U nited and S trengthening A merica by P roviding A ppropriate T ools R equired to I ntercept and O bstruct T errorism Prohibition on Correspondent Accounts for Foreign Shell Accounts , for Foreign Shell Banks - Section 313 Requirements – Terminate relationship no later than ten days after receipt of notice that the remote bank has ? Failed to consent to a summons or subpoena ? Initiate procedures in a US court to challenge the summons or subpoena

USA PATRIOT ACT & Correspondent Banking Guidelines 120 hour run – Not later than 120 hours in the wake of accepting a request ? Related to hostile to tax evasion compliance at a secured organization or, ? Regarding a client at a secured institution - Covered establishment should give data and documentation to account opened, kept up, directed, or oversaw in the US

PECULARITIES OF FOREX MARKETS An Over The Counter Market Only market open 24 hour a day SYD/TOK/TAIPEI-S'PORE-HK/INDIA/EUR/LON/NY 1.30PM/12.30PM/11.30AM/9.00AM/5.30AM//4.30AM/11.30PM-PREVIOUSDAY No single area – no hindrances Exchange rates change practically like clockwork Other markets-cash, capital, & obligation – likewise influence forex advertise Controls/approaches of particular governments additionally influence forex markets Settlement of forex exchanges typically don't occur all the while .

Factors Influencing Currency Value Economic Factors 1. Balance of Payment 2. Interest Rates 3. Inflation 4. Monetary and Fiscal Policy 5. International Competitiveness 6. Monetary Reserves 7. Government Controls and Incentives 8. Importance of Currency in World Political Factors 9. Political Party and Leader Philosophies 10. Proximity of Elections or Change in Leadership Expectation Factors 11. Expectations 12. Forward Exchange Market Prices

FX Rates What is Exchange Rate ? Conversion standard is a rate at which one money can be traded into another cash. Remote Exchange Deal Involves the offer of one money and the buy of another at a concurred conversion scale

How Banks cite spot rates to clients? Find out the progressing market rate Load an edge Quote Cover One of the gathering to the exchange must be a bank i.e. Promotion

SPREAD THE DIFFERENCE BETWEEN THE BUYING AND SELLING RATE (BID AND OFFER RATES) IS KNOWN AS SPREAD

Calculating Cross Rates India is a market producer for Indian Rupee Dollar/Rupee exchanging ( the principal cites) begin in the Mumbai Market BUT WHAT ABOUT OTHER CURRENCIES ? WHERE DO RATES FOR CHF, GBP, EUR ETC COME FROM? HOW ARE THEY CALCULATED? A CHF/RUPEE RATE IS A CROSS OF DOLLAR/RUPEE & DOLLAR/CHF . DOLLAR/RUPEE = 45.35/36 DOLLAR/CHF = 1.3440/45 CHF/RUPEE = 33.73/75 as it were , 45.36/1.3440 = 33.75 AND 45.35/1.3445 = 33.73

Calculating Cross Rates … 2 FOR GBP ( EUR , AUD )/RUPEE RATE CROSS RATE IS ARRIVED AT BY MULTIPLICATION DOLLAR/RUPEE = 45.35/45.36 x GBP/USD = 1.7960/1.7965 GBP/RUPEE = 81.45/81.49

Forward Rates What is a Forward Rate ? Rate concurred for settlement on a concurred date later on All rates are gotten from Spot rates Forward rate is the spot rate balanced for the premium/markdown Forward Rate = Sp