bikash bajaj forex

8/6/2019 Bikash Bajaj Forex

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FINAL REPORT

On

Financing Of Foreign Trade

And

Foreign exchange accounting

.

Submitted By

Bikash Bajaj

07BS0938

2007-2009

Faculty Guide Project Guide

Prof. Debarati Bhattacharya Mr. Arun Chakraborty

ICFAI Business School Senior Manager

KOLKATA Syndicate bank


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A REPORT

On

Financing Of Foreign Trade

And

Foreign exchange accounting

At Syndicate bank

Submitted By

Bikash Bajaj

07BS0938

A report submitted for fulfillment of the requirements of

MBA Program of ICFAI Business School


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Table of content:

Cover page..1

Acknowledgement..4

About syndicate bank.6

Abstract..8

Executive summary11

Introduction.13

Foreign exchange market.13

Exchange control.15

Role of banks in foreign trade..17

Foreign exchange business in syndicate bank17

Exchange rate system..19

Factors determining exchange rates.20

Purchasing power parity and interest rate parity.22

Different type of rates23

Types of foreign exchange trading24

Export finance..25

Letter of credit30

Import finance37

Commission and charges40

Case study.45

Foreign exchange accounting..47

SWIFT mechanism..48

List of current account transaction.51


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Recommendation..54

References55

ACKNOWLEDGEMENT

Behind every success there is so much of effort, pain, continuous encouragement required. This

is also true in my case, to prepare this report I had to understand the rules regulation framed by

R.B.I and govt. of India to carry on foreign trade as well as practical knowledge how things

actually work. I express my gratitude to Mr. Arun Chakraborty (senior manager of FXPC dept.

of Syndicate bank) and Prof. Debarati Bhattacharya (faculty at ICFAI business school, Kolkata)

for showing me correct way to proceed for this project, also timely guidance and encouragement

to learn and understand every aspect of this project.

I would like to thank specially Mr. Arun kr. Chakraborty for giving me opportunity to work in

practical environment and learn things from practical documents.

Also I cant ignore the contribution of other staff member of FXPC department, especially Mr.

Pulak Roy and Deben Modak for giving me simple yet useful information. I am sure that

knowledge gain through this project will help me in long run for enriching my career.

Beside the above I would also like to thank the other faculty member of IBS, Kolkata for being

giving me important input for the project and library member for being so helpful to me.


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Mission of syndicate bank


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Priority Sector Credit: To have accelerated & qualitative growth in priority sector lending to

reach a level of Rs.23800 crore, Rs.10800 crore under agriculture, Rs.3514 crore under Small &

Micro Enterprises through various customer friendly credit products of the Bank and to take

maximum advantage of Financial Inclusion to expand the clientele base of the Bank, leverage

training facilities in SIRDs and RUDSETIs and provide financial assistance to all eligible

candidates.

Information Technology: To harness the state-of-the-art technology, network all branches,

create an Enterprise-wide Data Warehouse for the Bank, so as to make available reliable MIS for

Decision Support System and deploy best practices in Information Security to manage the

business effectively and profitably

Management of Assets: To make the year 2007-08 truly a "Year of NPA Resolution" by

striving for getting "A" rating under asset quality by upgrading NPAs, bringing down Gross

NPA & Net NPA level both in absolute & percentage terms below March 2007 figure and

accomplishing NPA recovery target as per commitment.

Forex and Treasury: To profitably manage the forex and investment assets of the Bank to

achieve an export and import turnover of Rs.15000 crore and Rs.12750 crore respectively. To

achieve treasury income of Rs.2345 crore with investments of Rs.35000 crore

Profitability: To make every branch a profit centers and ensures best possible returns to the

stakeholders.

Risk Management: To continuously upgrade the Risk Management systems & processes,

imbibe risk management in business activities and implement Base II requirements for the

benefit of all stakeholders

Human Resources & Organization structure: To mould and strengthen the organizational

structure to meet the future business requirements and challenges. To redefine and redevelop

peoples management techniques so as to unleash human potential, drive growth and nurture

leadership of high quality corporate governance


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BRIEF HISTORY

Syndicate Bank was established in 1925 in Udupi, the abode of Lord Krishna in coastal

Karnataka with a capital of Rs.8000/- by three visionaries - Sri Upendra Ananth Pai, a

businessman, Sri Vaman Kudva, an engineer and Dr.T M A Pai, a physician - who shared a

strong commitment to social welfare. Their objective was primarily to extend financial

assistance to the local weavers who were crippled by a crisis in the handloom industry through

mobilizing small savings from the community. The bank collected as low as 2 annas daily at the

doorsteps of the depositors through its Agents under its Pigmy Deposit Scheme started in 1928.

This scheme is the Bank's brand equity today and the Bank collects around Rs. 2 crore per day

under the scheme.

The progress of Syndicate Bank has been synonymous with the phase of progressive banking in

India. Spanning over 80 years of pioneering expertise, the Bank has created for itself a solid

customer base comprising customers of two or three generations. Being firmly rooted in rural

India and understanding the grassroots realities, the Bank's perception had vision of future India.

It has been propagating innovations in Banking and also has been receptive to new ideas, without

however getting uprooted from its distinctive socio-economic and cultural ethos. Its philosophy

of growth by mutual sustenance of both the Bank and the people has paid rich dividends. The

Bank has been operating as a catalyst of development across the country with particular

reference to the common man at the individual level and in rural/semi urban centers at the area

level.

The Bank is well equipped to meet the challenges of the 21st century in the areas of information

technology, knowledge and competition. A comprehensive IT plan is being put in place and the

skills and knowledge of the Bank's personnel are being upgraded through a variety of training

programmers to promote customer delight in every sphere of its activity. The Bank has launched

an ambitious technology plan called Centralized Banking Solution (CBS) whereby 500 of our

strategic branches with their ATMs are being networked nationwide over a 4 year period.


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ABSTRACT

The project is mainly to understand the foreign exchange mechanism, understand the different

rates have given by syndicate bank to its customer, how bank meet the financial needs of its

customers who are indulging in import and export trade.

The FXPC (Foreign Exchange Processing Centre) department of Syndicate bank finances its

customers who are indulging in the import trade in the form of letter of credit. Opening a letter

of credit on behalf of its customer is same as giving assurance to the exporter to mature his dues

on presentation of specified documents whether the importer paid or not paid to the bank.

Generally credit support to importers are extended in the form of opening of LC, Financing

imports in the form of cash credit , loans mostly against import trust receipt, effecting payment

in foreign exchange directly to overseas sellers and also by issuing deferred payment guarantees

favoring overseas sellers on behalf of importer who is importing capital goods on long term

credit.

Also bank finance its customer who are involve in export trade in the form of pre- shipment and

post- shipment finance.

Pre-shipment Finance or Packing Credit is the advance granted to the exporter to procure

process, manufacture, and pack and prepare the goods for export. In other words, it is the facility

extended to the exporter before and until the goods are shipped for export.

Post-shipment Finance refers to the credit facilities extended to the exporter from time to time

goods are shipped and till the export proceeds are realized. Post-shipment finance may take any

of the following forms:

Negotiation of a bill drawn under a letter of credit

Purchase of a bill not drawn under a letter of credit

Advance against bill sent for collection

Amount of finance:


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EXPORT:

Amount of loan will not normally exceed FOB value of goods or domestic market value of

goods whichever is lower. However, packing credit may be granted up to the domestic cost of

goods even if it is higher than FOB value, provided the goods are covered by export incentives

of the Government of India and availability of Export Production Finance Guarantee offered by

ECGC.

Post shipment finance can be extended up to 100 % of the invoice value of the goods.

However, banks are free to stipulate margin requirements as per their lending norms.

Imports:

Bank lending activities under import financing are mainly concentrated on activities like:

Import of consumables inputs and channelized items

Import of plant and machinery

Import made under short term credit facility extended by overseas seller

To understand the total functioning of foreign trade one need to learn and understand the rules

and regulation framed by Govt. of India and RBI. Also to understand the whole procedure from

opening a letter of credit to payment for the same, one has to follow the rules so it is

indispensible that everything is worked out by following the rules of FEMA, UCPDC 500 or 600

and FEDAI guidelines. Also the documents required, which is the most important element of

letter of credit.

Also it is important to know the exchange rate and how its being quoted (which rate should be

given to customers). Sometimes its happen that a customer want to buy a currency but for that

no ready seller available in the market to sell the same currency in exchange of another currency.

So the buyer has to take another way to buy the required currency. He needs to buy another

currency and then exchange that with the required currency. This is called cross rate system.

The whole thing will be clear with a simple example. Suppose a customer want to buy dollar in

exchange of rupee but dollar does not available in exchange of rupee but available in exchange

of pound. Again dollar is available in exchange of pound. So the customer needs to buy pound

first in exchange of rupee then again exchange the pound in exchange of dollar.


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Forward exchange rate is another important rate which is often using to do forward trade. Means

when currency is required in future date. So customer buy the currency at forward rate in present

(detail calculation of forward rate is shown in report).

Taking about accounting part the all transactions are recorded in the books of account by

following the law of double entry system like other business. But what different in FXPC

department of Syndicate bank is that they maintain mirror image accounting, which is same with

the accounts which are maintained by head office of forex department. So with the help of this

mirror image accounting the FXPC department is able to calculate its profit, loss and expenses

by itself and work according to the situation. Also they are advised to recover all their expenses

in form of commission, charges and through margin money. Also bank maintain different type of

accounts (like Vostro, Nostro and Loro) to facilitate its customer.

SWIFT (Society for Worldwide Interbank Financial Telecommunication) mechanism facilitates

the import and export trade. It is worldwide interbank software through which important

documents are sent via internet. As for example suppose Mr. X of India export goods to Mr. Y of

London. Now Mr. Y request an issuing bank (say HSBC London) to draw a letter of credit in

favor of Mr. X, henceforth HSBC London advises the advising bank (say Syndicate bank,

Kolkata) to pay Mr. X after checking the required document which are essential to check before

making the payment. Document like letter of credit and all advising messages are sent through

this secured software SWIFT.


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Executive Summary

Forex market is an over the counter market in which currencies are bought and sold against each

other. The market is basically characterized by no physical presence, huge size, dominated by

financial flows, deep, highly liquid and efficient, sleek being screen- based , highly volatile 24

hours a day market and yet a profit centre with simultaneous potential for losses. The banks

extend financial assistance to the exporters at pre-shipment and post shipment stages. Financial

assistance extended to the exporter prior to the shipment of the goods from India falls within the

scope of pre shipment finance while that extended after shipment of goods falls under post

shipment finance. In India, investors can raise substantial portion of project costs through debt

and equity instruments. Applications for long-term loans can be made to State Financial

Corporations when the project is small-generally less than 50 million. Institutions expect

concrete project and market reports, with reasonably firm cost and implementation plan .Otherlong-term financing options include leasing, hire purchase, deferred payment guarantee etc.

Short-term finances for working capital requirements are available from commercial banks and

through instruments such as fixed deposits, intercourse deposits and commercial papers.

The main players in the foreign exchange market are large commercial Banks, forex brokers,

large corporations and the Central Banks.

Type of finance:

Packing credit is normally a funded advance. It takes the form of an unsecured/clean loan in the

initial stages of disbursement of funds .It is called extended packing credit. When the exporter

gets a title to the goods it becomes a secured advance.

At times pre-shipment finance will be extended in a non-fund form, like issuing LCs favoring the

supplier of raw materials, opening guarantees for credit purchases, etc.

Quantum of finance:

export

Quantum of loan will not normally exceed FOB value of goods or domestic market value of

goods whichever is lower. However, packing credit may be granted up to the domestic cost of

goods even if it is higher than FOB value, provided the goods are covered by export incentives of

the Government of India and availability of Export Production Finance Guarantee offered by

ECGC.

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Post shipment finance can be extended up to 100 % of the invoice value of the goods.

However, banks are free to stipulate margin requirements as per their lending norms.

Imports

Bank lending activities under import financing are mainly concentrated on activities like:

Import of consumables inputs and channelized items.

Import of plant and machinery.

Import made under short term credit facility extended by overseas seller.

Credit support to imports are extended in the form of opening of LC, Financing imports in the

form of cash credit , loans mostly against import trust receipt, effecting payment in foreign

exchange directly to overseas sellers and also by issuing deferred payment guarantees favoring

overseas sellers on behalf of importer who is importing capital goods on long term credit.

Introduction

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Foreign exchange market is the largest financial market in the world, with an estimated daily

average turnover well in excess of US$1 trillion. A foreign exchange rate is the relationship

between two currencies, which means the amount of one currency that would be required to buy

(or sell) one unit of another currency. Currencies are quoted in pairs, e.g. Euro/US$ =

EUR/USD, US$/Japanese Yen = USD/JPY, etc. Forex trading involves a foreign exchange

transaction, defined as the simultaneous buying of one currency and selling of another currency.

Forex trading is said to be a 24-hour, 5 day a week market, starting each day in Wellington, NZ

and then moving around the globe as the business day commences in the next financial center.

This rotation includes Tokyo, London, and New York. This allows foreign exchange market

participants to react to news, whether it is economic political or social, 24 hours per day. Unlike

other markets, such as stocks or futures, forex trading does not involve a central exchange and is

considered to be an over the counter market known as the interbank market. Most forextransactions are conducted between two counterparties via the telephone or over an electronic

network, such as the internet.

Forex trading, once the province of commercial, investment and central banks has evolved over

the years as other players took on a greater role in foreign exchange. This has seen forex trading

evolve as multi-national companies, hedge funds, fund managers; individual speculators and

private investors took on a greater influence. The evolution of the internet has further opened

forex trading to the independent currency trader who can follow the market on a 24-hour basis

and trade foreign exchange online.

Factors that have attracted the retail currency traders to forex trading include the ability to trade

24 hours, 5 days per week, and a high level of foreign exchange market liquidity, the ability to

benefit in both bull and bear markets, narrow bid-offered spreads by historical standards, low

margin requirements and general market volatility.

FOREIGN EXCHANGE MARKET

The foreign exchange (currency or forex or FX) market exists wherever one currency is traded

for another. It is by far the largest market in the world, in terms of cash value traded, and

includes trading between large banks, central banks, currency speculators, multinational

corporations, governments, and other financial markets and institutions. Retail traders (small

speculators) are a small part of this market. Large commercial banks are the major traders in thismarket

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The Forex market itself consists of a worldwide network of primarily interbank traders

connected by telephone lines and computers. FX traders constantly negotiate prices between one

another and the resulting market bid/ask price for a particular currency is then fed into computers

and displayed on official quote screens. It offers huge returns like twenty to thirty percent every

month, yes unbelievable but truth, however that is only in some cases and you need a lot of

experience to be able to extract that amount of interest.

The benefits of online forex trading are listed below:

- Currency market never sleeps: online forex trading allows you to keep track and deal from

anywhere at any time.

- Mini accounts: some websites offer mini accounts that allow you to get started with as less as

$200.- No Commission: Online forex trading is commission free, theres no exchange or hidden fee

either. The brokers only earns from the spreads.

- Instant: it is instant unlike offline trade, which may involve paperwork.

NEED FOR FOREIGN EXCHANGE:

Currency exchange is necessary in numerous circumstances.

Consumers typically come into contact with currency exchange when they travel. They

go to a bank or currency exchange bureau to convert one currency into another so that

they can pay for the goods and services in the foreign country.

Businesses typically have to convert currencies when they conduct business outside their

home country

Investors and speculators require currency exchange whenever they trade in any foreign

investment, be that equities, bonds, bank deposits, or real estate.

Commercial and Investment Banks trade currencies as a service for their commercial

banking, deposit and lending customers. These institutions also generally participate in

the currency market for hedging and proprietary trading purposes.

Governments and central banks trade currencies to improve trading conditions or to

intervene in an attempt to adjust economic or financial imbalances. Although they do not

trade for speculative reasons -- they are a non-profit organization -- they often tend to be

profitable, since they generally trade on a long-term basis.

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Market participants:

The market participants can be split into five groups:

End users of foreign exchange: firms, individuals governments who need foreign

currency in order to acquire goods and services from abroad or to move capital as part of

their regular economic activities

Market makers: large international banks who hold stocks of currencies to allow the

market to operate continuously and who make their profits through the spread between

buying and selling rates of exchange

Speculators: banks, firms and individuals who attempt to profit from outguessing the

market

Arbitrageurs: banks that make profits from buying in one market at the same time asselling in another, taking advantage of small inconsistencies which develop between

markets.

Central banks: on behalf of their government enter the market to attempt to influence to

influence the international value of their currency- perhaps to protect a fixed rate of

exchange, or to manage to varying degrees an allegedly market-determined rate.

EXCHANGE CONTROL:

Exchange control refers to the control, by the government or a centralized agency, of transactionsinvolving foreign exchange.

OBJECTIVES OF EXCHANGE CONTROL:

The purposes for which exchange control is imposed are many but important among them are

enumerated below:

a) Stability of exchange rates: A constantly changing exchange rate may not be conducive to the

economy and the government may therefore adopt exchange control methods to stabilize the

exchange rate of the currency.

b) Overvaluation of currency: The exchange control may aim at keeping currency overvalued.

When the currency is overvalued imports become cheaper, it is encouraging imports of essential

commodities into the country.

c) Undervaluation of currency: At times the exchange control may function to undervalue a

currency in order to maintain the balance of payments of the country. When the currency is

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undervalued, exports become cheaper, thus increasing exports to regain the balance of payments

of the country.

d) Reserve foreign exchange for essentials: Exchange control may be imposed to acquire foreign

exchange to be utilized for importing certain essential commodities from abroad.

e) Economic planning: For proper execution of the economic plans, exchange control helps to a

great extent by controlling the foreign exchange market.

f) Encourage local industries: The government may desire to protect the local industries from

competition from abroad. Imports mat be restricted so that the local industries are allowed to

grow.

METHODS OF EXCHANGE CONTROL:

Exchange control may take any of the following forms:

a) Exchange intervention Location: Exchange intervention or official intervention refers to the

buying and selling of foreign exchange in the market by the government or its agency (central

bank) with the view to influencing the exchange rate.

b) Indirect methods:

(i) Import restrictions and tariffs

(ii) Export subsidy

(iii) Interest rate changes

EXCHANGE CONTROL IN INDIA:

FEMA guidelines

FEDAI guidelines

Some of the exchange control can be listed as under:

Importer-Exporter code number every exporter is required to follow the export trade

regulations framed by director general of foreign trade. One such regulation is that every

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exporter should have an importer-exporter code number allotted by the regional import

trade control authorities.

Export declaration forms all exports from India should be declared in any of the

following export declaration forms as is appropriate:

1. Form GR exports otherwise than by post, including export of software in physical form,

i.e., magnetic tapes and paper media.

2. Form SDF exports through custom offices with EDI system.

3. Form PP exports by post.

4. Form SOFTEX export of software otherwise than in physical form.

ROLE OF BANKS IN FOREIGN TRADE:

Commercial banks have a vital role in the foreign trade of a country. They provide the finance

needed to execute the transactions. Foreign exchange is a highly specialized business and is

therefore concentrated in selected branches of the bank. The foreign exchange department, also

called the international banking division, is headed by a senior executive of the bank who is

vested with enough powers to take decisions in the dealings of the bank. While policy decisions

are taken and foreign exchange resources are managed at the corporate level, the actual dealings

with the customers takes place at the selected branches of the bank authorized to deal in foreign

exchange.

The functions of the foreign exchange department can be listed as follows:

a) Financing exports

b) Financing imports

c) Remittance facilities

d) Dealings in foreign exchange

e) Furnishing credit information

Foreign exchange business in syndicate bank:

Syndicate bank provides the finance needed to execute the foreign trade transactions. Foreign

exchange is a highly specialized business and is therefore concentrated in selected branches of

the bank. The foreign exchange department, also called the international banking division, is

headed by a senior executive of the bank who is vested with enough powers to take decisions inthe dealings of the bank. While policy decisions are taken and foreign exchange resources are

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managed at the corporate level, the actual dealings with the customers takes place at the selected

branches of the bank authorized to deal in foreign exchange.

The functions of the foreign exchange department can be listed as follows:

a) Financing exports

b) Financing imports

c) Remittance facilities

d) Dealings in foreign exchange

e) Furnishing credit information

Services offered to Exporters in Syndicate Bank:

Pre-shipment finance in foreign currency and Indian rupees

Post-shipment finance in foreign currency and Indian rupees

Handling export bills on collection basis

Outward remittances for purposes as permitted under Exchange Control

guidelines Inward remittances including advance payments

Quoting of competitive rates for transactions

Maintenance of Exchange Earners Foreign Currency (EEFC) accounts

Assistance in obtaining credit reports on overseas parties

Forfeiting for medium term export receivables

Services offered to importers in Syndicate Bank:

Establishment of Import Letters of Credit covering import into India and

handling of bills under Letter of Credit

Handling of import bills on collection basis

Remittance of advance payment against imports

Offering utilization of PCFC ( pre-shipment credit in foreign currency) for

imports

Credit reports on overseas suppliers

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Exchange rate system:

The rate of exchange is the rate at which one currency is converted into another. For example, an

US dollar is not usable in India unless and until it is converted into Indian rupee. The dollar can

be converted into Indian rupees either by an authorized banker or by a money changer. Let say

that one need to pay 40 rupee for exchange of a dollar. Then us$ 1= Rs. 50 would be termed as

exchange rate.

Countries round the world have been exchanging goods and services from ancient time. Initially

it was barter system in which one good exchanged against another. But with the invention of

currency gradually barter trade disappeared. Also trade between countries flourished as no

country was self sufficient to meet all his requirement.

There have to be scientific way of relating the value of one currency with another. This is what

the exchange rate system does. It helps in fixing the rate of exchange of currency with another.

In another words exchange rate is nothing but value of one currency expressed in terms of

another.

Different countries adopted different exchange rate system at different times. During last one and

a half centuries the world has experimented with many exchange rate systems and moved on

from that system when it failed to provide solutions in increasing growth in international trade

and liquidity. The exchange rate systems used so far are:

The gold standard

Gold specie standard

Gold bullion standard

Purchasing power parity

Breton woods exchange rate system

Fixed exchange rate and floating exchange rate

Exchange rate determination:

As in the case of any other commodity, it is the market demand and supply of currencies that

fixes the rate of exchange. The importer of goods and services, need to pay different currencies

since they have to make the payment to overseas suppliers of goods and services. The supply is

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provided by exporters, remittances by overseas Indians, etc., who have the concerned currency at

a future date. There are other factors also other than demand and supply which affects exchange

rate.

Factors determining foreign exchange rates:

Balance of payments: it is a value of the record of transactions between residents of a country

with outsiders. In other words it represents the demand for and supply of foreign exchange which

will determine the value of the exchange rate. Exports both visible and invisible represent the

supply side; imports visible and invisible create demand for the currency.

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Supply of a

currency

Demand for

a currency

RATES OF EXCHANGE

OTHER FACTORS

BALANCE OF PAYMENTS

INFLATION

INTEREST RATES

MONEY SUPPLY

POLITICAL FACTORS

MARKET SENTIMENTS

TECHNICAL FACTORS


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Inflation: This means rise in the prices of domestic commodities. With increase in price the

exports may be affected, as it will cease to be competitive. To give an example, If both India and

US experience seven percent inflation, the rate of exchange will not change. On the other hand

India has 15 percent inflation and US has five percent inflation, then the Indian rupee will

depreciate by 10 percent.

Interest rates: Interest rates have a great influence on short term movement of capital. When the

interest rates in a one centre rise it attracts funds from other centers. The result would be demand

for those currency increases, hence it appreciates.

Money supply: an increase in money supply in the economy increases the supply of the currency

in the foreign exchange market and its value declines.

Political factors: political stability induces confidence in the investors and encourages capitalinflows into the country. This would strengthen the currency and it would appreciate. In likewise

situation where the political situation is volatile there will be a flight of capital and the currencys

value would decline and depreciate.

Market sentiments: in the short term the exchange rate is affected mostly by the views of the

market participants. If they are buoyant about the market the currency will appreciate. For

example, let us presume the market expects that the balance of payment of India would be a

deficit of RUPEES 100000 crore. But when the figures are released the deficit is larger. This

would immediately depress the rate of exchange of the rupee temporarily.

Technical factors; isolated large transactions can upset the markets ability to balance supply

with demand for the currency. The immediate effect is distortion of exchange rate. The

immediate effect is distortion of exchange rate . for example , whenever the big oil companies

enter the forex market for purchase of us dollars for imports of oils into India, it depress the

value of Indian rupee by appreciating the value of us dollars. Hence in order not to upset the

market, us dollar is purchased right through the month. Sometimes some of the currencies are

subject to regular monthly or weekly cycles due to impact of large regular payments.

Purchasing power parity:

Purchasing power parity is an economic technique used when attempting to determine the

relative values of two currencies. It is useful because often the amount of goods a currency can

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purchase within two nations varies drastically; based on availability of goods, demand for thegoods, and a number of other, difficult to determine factors.

Purchasing power parity solves this problem by taking some international measure anddetermining the cost for that measure in each of the two currencies, then comparing that amount.

One of the primary uses of purchasing power parity is in lessening the misleading effects ofshifts in a national currency. This is particularly an issue when calculating a nation's GrossDomestic Product. For example, if the riel falls in value to 80% of its value on the dollar, theGDP as expressed in US dollars will also drop to 80%. This does not accurately reflect thestandard of living in that country (a common use of GDP). Purchasing power parity is of coursean imperfect device for determining things such as GDP, as the exchange rate will vary based onthe basket item used for the index. This effect is lessened by looking at a large sample ofcommodities, rather than one or two, but this simply minimizes the problem, it does noteliminate it entirely.

Interest rate parity:

Interest rate parity the difference between the interest rates paid on two currencies should beequal to the differences between the spot and forward rates.

If interest rate parity is violated, then an arbitrage opportunity exists. The simplest example ofthis is what would happen if the forward rate was the same as the spot rate but the interest rateswere different, and then investors would:

1. borrow in the currency with the lower rate

2. convert the cash at spot rates3. enter into a forward contract to convert the cash plus the expected interest at the same

rate4. invest the money at the higher rate5. convert back through the forward contract6. Repay the principal and the interest, knowing the latter will be less than the interest

received.

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Different types of rates:

TT buying rate : this rate is applied for all purchase transactions where the Nostro account of the

bank is credited . This rate is calculated by deducting the exchange margin from the interbank

buying rate of the currency. The base rate is the interbank rate

Bill buying rate: this rate is applied for foreign bills purchased. Exporters draw bills of exchange

on their foreign customers. They can sell these bills to an AD for immediate payment. The AD

buys bills and collects payment from the importer. Since there is a delay between the AD paying

the exporter and itself getting paid, various margins have to be subtracted from the TT buying

rate to compute the bill buying rate.

Bills are of two kinds. Sight or demand bills require payment by the drawer on presentation. The

delay involved in such a bill is only the transit period. Usance bills give time to the importer to

settle the payment. In such cases the delay involved is transit period plus the usance period

TT selling rate: the base rate here is the interbank spot selling rate. As usual the exchange margin

is subject to a ceiling specified by FEDAI.

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Bills selling rate: when an importer requests the make to make a payment to a foreign supplier

against a bill drawn on the importer, the bank has to handle documents related to the transaction.

For this, the bank loads another margin over the TT selling rate to arrive at bills selling rate.

Exchange rate sheet is prepared daily after taking the market rate in the dealing room of

Syndicate bank which is situated in Mumbai. FXPC department of Syndicate bank received daily

rate sheet from dealing room.

In the rate sheet TT sell and BIL sell is two columns which rates are quoted to the importer. For

opening an L/C, BIL sell rate are given to the importer. Also the other columns BIL buy indicate

the rate which is quoted to the exporter. CPC and TC buy are the rates which are given for

cheque and travelers cheque. Generally travelers got worst rate.

WAR is the weekly average rate which is used for accounting purpose. Currency rates are spotrates which is being quoted if customer want to buy or sell currency in spot market. Usance rates

are the forward rates which are quoted for forward transaction.

TYPES OF FOREIGN EXCHANGE TRADING:

Depending upon the time elapsed between the transaction date and the settlement date the

foreign exchange transactions can be categorized into:

Cash transactions having same transaction and settlement date

Tom transactions settlement date is one day after transaction date

Spot transactions settlement date is two days after transaction date

Forward transactions settlement date is beyond two days after transaction date

Swap transactions it is a combination of spot and forward transactions. They are again

of following types:

a) cash/tom swaps

b) cash/spot swaps

c) spot/forward swaps

d) forward/forward swaps

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Export finance:

Exports play a very important role and are given utmost priority in the foreign trade policy of

any country particularly in developing countries. Indian economy being one such, is attaching

great importance to promote exports. Finance is the backbone of any trade, whether domestic or

international and export being a part of international trade is no exception. Export finance,

therefore plays a very crucial role in development of international trade and serves the process of

economic development, which is a national objective. Banks, being the main source of finance,

are encouraged in several ways to extend export finance, to achieve the objective of foreign trade

policy.

An exporter may need financial assistance for execution of an order from the date of receipt of

an export order till the date of realization of export proceeds at any stage. Export finance is short-

term working capital finance allowed to an exporter. Export finance can be broadly classified

into two categories, depending upon at what stage of export activity the finance is extended viz.

Pre-shipment credit

Post-shipment credit

Pre-shipment Credit means any loan or advance or any other credit provided by a bank to an

exporter for financing the purchase, processing, manufacturing or packing of goods prior toshipment. On the other hand Post- shipment Credit means any loan or advance granted or any

other credit provided by a bank to an exporter of goods from India after the shipment of goods to

the realization of the export proceeds. Thus the dividing line between the two types of export

credits is the date of shipment. Generally, the pre-shipment credit is extinguished by the

submission of export bills and connected documents. Thereafter, it is called post-shipment credit,

Pre-shipment credit:

As noted above, the pre-shipment credit meets the working capital needs of an exporter at the

pre-shipment stage. When an exporter receives an export order, the goods to be exported may notbe readily available with him for shipment. He has to purchase the raw materials/semi-finished

goods, process/manufacture the same, or may procure the goods from their suppliers, pack them

and dispatch them to the port. The funds required for all these purposes are called pre-shipment

credit.

Banks provide pre-shipment credit after taking into consideration all factors relevant for granting

credit. But the basis of granting such credit is:

Pre-shipment credit is to be granted for the period which is sufficient to meet the needs of

the exporter. But if the period of credit exceeds 180 days, no refinance will be granted bythe Reserve Bank of India. If the pre-shipment advance is not adjusted by submission of

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export documents within 360 days, the advance will not remain eligible for concessional

rate of interest.

Packing credit may be released in one lump sum or in installments as required by the

exporter. Banks must monitor the end-use of the funds and ensure their utilization for

genuine requirement of exports.

Pre-shipment credit must be liquidated out of the proceeds of the export bill on its

purchase, discount etc by the banker. Thus the pre-shipment credit must be converted into

post-shipment credit.

In case of agro-based products, the non-exportable products are to be sold within the

country. Banks must charge interest at commercial rate, as applicable to domestic

advance, on packing credit covering non-exportable portion.

In some cases, exporters need packing credit in anticipation of receipt of letters of

credit/firm export order from importers. This happens when the raw materials are

seasonal in nature or when the manufacturing time is greater than the delivery schedule.

In such cases, banks may extend Pre-Shipment Credit Running Account facility and

grant credit taking into account the exporter's needs and without insisting on firm export

order or letter of credit.

Post-shipment credit:

Need for post-shipment credit arises after the exporter has shipped the goods and has secured the

shipping documents, such as bill of lading, etc. Now, the concern of the exporter is to realize his

dues from the foreign importer. This is invariably done by drawing a bill of exchange on the

importer. The bill may be drawn either on Documents against Acceptance (D/A) basis or on

Documents against Payment (D/P) basis. In the former case, the importer takes delivery of the

documents by giving his acceptance on the bill, sent to him through the exporter's banker.

Thereafter he takes delivery of the goods from the shipping company and makes payment of the

accepted bill on its due date. In case the bill is drawn on DIP basis the documents are released to

the importer at the time he makes payment of the bill to the exporter's bank, on its presentation.

Exporter's bank provides post-shipment advance to the exporter in either of the two ways:

By purchasing, discounting or negotiating the export bills

By granting advance against bills for collections

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Thus, post-shipment credit is liquidated by the proceeds of the export bills when received from

the importer by the exporter's bank.

Banks also grant advances to the exporters against duty drawback which he has to receive from

the government. Such advance is liquidated when the amount of duty drawback is received by

the exporter.

Post-shipment finance is the finance provided against shipping documents. It is also providedagainst duty drawback claims. It is provided in the following forms:

Purchase of Export Documents drawn under Export Order:

Purchase or discount facilities in respect of export bills drawn under confirmed export order aregenerally granted to the customers who are enjoying Bill Purchase/Discounting limits from theBank. As in case of purchase or discounting of export documents drawn under export order, thesecurity offered under L/C by way of substitution of credit-worthiness of the buyer by the issuing

bank is not available, the bank financing is totally dependent upon the credit worthiness of the

buyer, i.e. the importer, as well as that of the exporter or the beneficiary. The documents dawnon DP basis are parted with through foreign correspondent only when payment is received whilein case of DA bills documents (including that of title to the goods) are passed on to the overseasimporter against the acceptance of the draft to make payment on maturity. DA bills are thusunsecured. The bank financing against export bills is open to the risk of non-payment. Banks, inorder to enhance security, generally opt for ECGC policies and guarantees which are issued infavor of the exporter/banks to protect their interest on percentage basis in case of non-payment ordelayed payment which is not on account of mischief, mistake or negligence on the part ofexporter. Within the total limit of policy issued to the customer, drawee-wise limits are generallyfixed for individual customers. At the time of purchasing the bill bank has to ascertain that this

drawee limit is not exceeded so as to make the bank ineligible for claim in case of non-payment.

Advances against Export Bills Sent on Collection:

It may sometimes be possible to avail advance against export bills sent on collection. In suchcases the export bills are sent by the bank on collection basis as against their

purchase/discounting by the bank. Advance against such bills is granted by way of a 'separateloan' usually termed as 'post-shipment loan'. This facility is, in fact, another form of post-shipment advance and is sanctioned by the bank on the same terms and conditions as applicableto the facility of Negotiation/Purchase/Discount of export bills. A margin of 10 to 25% is,however, stipulated in such cases. The rates of interest etc., chargeable on this facility are also

governed by the same rules. This type of facility is, however, not very popular and most of theadvances against export bills are made by the bank by way of negotiation/purchase/discount.

Advance against Goods Sent on Consignment Basis:

When the goods are exported on consignment basis at the risk of the exporter for sale andeventual remittance of sale proceeds to him by the agent/consignee, bank may finance againstsuch transaction subject to the customer enjoying specific limit to that effect. However, the bankshould ensure while forwarding shipping documents to its overseas branch/correspondent toinstruct the latter to deliver the document only against Trust Receipt/Undertaking to deliver thesale proceeds by specified date, which should be within the prescribed date even if according to

the practice in certain trades a bill for part of the estimated value is drawn in advance against theexports.

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Advance against Undrawn Balance:

In certain lines of export it is the trade practice that bills are not to be drawn for the full invoicevalue of the goods but to leave small part undrawn for payment after adjustment due todifference in rates, weight, quality etc. to be ascertained after approval and inspection of thegoods. Banks do finance against the undrawn balance if undrawn balance is in conformity withthe normal level of balance left undrawn in the particular line of export subject to a maximum of10% of the value of export and an undertaking is obtained from the exporter that he will, within6 months from due date of payment or the date of shipment of the goods, whichever is earliersurrender balance proceeds of the shipment. Against the specific prior approval from ReserveBank of India the percentage of undrawn balance can be enhanced by the exporter and thefinance can be made available accordingly at higher rate. Since the actual amount to be realizedout of the undrawn balance, may be less than the undrawn balance, it is necessary to keep amargin on such advance.

Advance against Retention Money:

Banks also grant advances against retention money, which is payable within one year from thedate of shipment, at a concessional rate of interest up to 90 days. If such advances extend beyondone year, they are treated as deferred payment advances which are also eligible for concessionalrate of interest.

Advances against Claims of Duty Drawback:

Duty Drawback is permitted against exports of different categories of goods under the 'Customs

and Central Excise Duty Drawback Rules, 1995'. Drawback in relation to goods manufactured in

India and exported means a rebate of duties chargeable on any imported materials or excisable

materials used in manufacture of such goods in India or rebate on excise duty chargeable under

Central Excises Act, 1944 on certain specified goods. The Duty Drawback Scheme is

administered by Directorate of Duty Drawback in the Ministry of Finance. The claims of duty

drawback are settled by Custom House at the rates determined and notified by the Directorate.

As per the present procedure, no separate claim of duty drawback is to be filed by the exporter. A

copy of the shipping bill presented by the exporter at the time of making shipment of goods

serves the purpose of claim of duty drawback as well. This claim is provisionally accepted by the

customs at the time of shipment and the shipping bill is duly verified. The claim is settled by

customs office later. As a further incentive to exporters, Customs Houses at Delhi, Mumbai,

Calcutta, Chennai, Chandigarh, and Hyderabad have evolved a simplified procedure under which

claims of duty drawback are settled immediately after shipment and no funds of exporter areblocked.

Period of Credit:

Export bills are of two types, Demand Bills, which are payable on demand or on presentation

before the importer. In case of demand bills, the banker grants an advance to the exporter, but the

period of advance should not exceed the normal transit period i.e. the average period normally

involved from the date of purchase/ discount of the bill till the receipt of the proceeds of the bill

by the bank. Such advance is thus automatically liquidated with the realization of the export

bills.

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Usance Bills which mature after a period of time. In case of usance bills banks grant credit for a

maximum period of 180 days from the date of shipment inclusive of normal transit period and

the grace period. Such bills are presented for acceptance.

Decisions before the importer and thereafter it are retained by the bank concerned. On its due

date it is presented again before the acceptor for its payment.

There are two methods of dealing with such bills-(a) purchase or discounting of the bills and (b)

collection of the bills.

Purchase/ Discounting of Bills:

In case of purchase of documentary bills by the exporters banker, it is usual for the latter to give

immediate credit for the bills. An amount by way of discount, fee, interest, etc, is charged by the

banker from the amount of the bill and the remaining amount is immediately made available to

the exporter (drawer of the bill). This facility is generally granted in case where the standing of

the exporter is good and he is considered credit-worthy for the amount of the bill, because in case

the drawee of the bill refuses to honour the bill, the banker shall be entitled to recover its amount

from the drawer exporter.

If the banker is unable to recover the amount of the bill from the exporter also his ultimate

remedy would be to realize it by disposing off the goods exported. Therefore while

purchasing/discounting the export bills, the banker takes into consideration the nature of the

goods covered by the bills, the nature of its demand and the possibilities of variations in its

price. Moreover, the exporter is required to take a suitable guarantee issued by the Export Credit

Guarantee Corporation.

In addition to the above, the banker also takes into account the foreign exchange regulations in

the importer's country and purchases the export bill if the importers country has not imposed

any restrictions on making such payments. The banker also examines the documents enclosed

with the bill and ensures that they are genuine and are in order.

Collection of Bills:

The banker collects the foreign bills on behalf of the customer in the same way as in the case of

home trade. In case the exporter sends to his banker export bills for collection, the latter proceedsaccording to the instructions given by the exporter drawer and makes its payment to him as and

when the proceeds of the bill are realized from the importer. Obviously, in case of collection of

bills, the banker does not grant any advance to the exporter immediately on receipt of the bills

for collection. Such practice is usually adopted when the exporter does not enjoy reputation

which is required in case the bill is purchased/discounted by the banker.

Negotiation of Bills under Letters of Credit:

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The reimbursing banker : The bank which is designated by the L/C opening bank to effect

reimbursement to the negotiating bank.

The negotiating banker : The bank in the sellers country which is authorized to purchase

the bills drawn by the seller.

Types of letter of credit:

According to the various need of import-export business different type of letter of credit is

required to open to facilitate easy repayment of the proceeds.

Documentary Letter of Credit and Clean Letter of Credit:

When the L/C contains a clause that documents of title to goods, such as bill of lading, insurance

policy, invoice, certificate of origin, etc, must be attached with the bill of exchange drawn under

L/C, it is called a documentary L/C. In the absence of such a clause, it is called a clean letter ofcredit.

Fixed Credit and Revolving Credit:

In case of fixed credit, the L/C specifies the amount up to which one or more bills may be drawn

by the beneficiary within the specified period of time. But in case of revolving credit, the L/C

specifies the total amount up to which bills drawn may remain outstanding at a time. As soon as

a bill is paid by the importer, another bill may be drawn by the exporter on the importer under

the same L/C.

Revocable and Irrevocable Letter of Credit:

When the opening banker reserves to itself the right to cancel or modify the credit at any time

without prior notice to the beneficiary, it is called revocable L/C. When a L/C cannot be revoked

or cancelled as above it is an irrevocable L/C and provides unconditional undertaking to the

exporter.

Confirmed and Unconfirmed L/C:

When the issuing banker requests the advising bank (i.e. the banker in exporters country), to add

its own confirmation, also to an irrevocable credit and the latter does so, it is called irrevocable

and Confirmed L/C. After confirmation the advising banker is called confirming banker and

takes upon itself the task of negotiating the export bills without recourse to the drawer.

With and without Recourse Credits:

In case of `With Recourse' bills the banker, as the holder of the bill, can recover obligation. The

negotiating banker should, therefore, take the following precautions the amount of the bill from

its drawer, in case the drawee of the bill fails to honour it. On the other hand, in case of Without

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Recourse credit the issuing banker will have recourse to the drawee only. If he fails to pay,

banker can realize by disposing off the goods.

Negotiation:

When a bill of exchange is drawn under a letter of credit, it may be negotiated with any banker in

the exporter's country. But if the L/C mentions the name of any particular bank for the purposeof negotiation, it must be negotiated only with that banker.

By negotiation we mean that the negotiating banker (i.e. the banker through whom the. export

bills are sent to the importer), pays to the drawer the value of the bill on the basis of the

undertaking given by the opening banker. But it is very important that the terms and conditions

specified in the L/C are duly complied with, because if any condition is not complied with, the

opening banker shall not remain liable to meet its Decisions obligation .The negotiating banker

should , therefore , take the following precautions at the time of negotiating the export bills.

The last date within which the bill must be negotiated has not expired because L/C becomes

ineffective after the expiry of such date.

The documents required to be attached with the bill must be in order. If the banker finds any

irregularity or deficiency therein, he must get it rectified; otherwise refuse to negotiate the bill.

The following documents are usually enclosed with the bill of

exchange:

Invoice: An itemized list of goods shipped to a buyer, stating quantities, prices, shippingcharges, etc.Bill of lading: In international trade shipping occupies an important place as a mode of

transport. The document evidencing the carriage of goods by sea is the bill of lading. A bill of

lading is a document issued by the shipping company or its agent, acknowledging the receipt of

goods for carriage which are deliverable to the consignee in the same condition as they were

received.

Marine Insurance Policy: Broadly, insurance covering loss or damage of goods at sea. Marine

insurance typically compensates the owner of merchandise for losses sustained from fire,

shipwreck, etc., but excludes losses that can be recovered from the carrier.

Certificate of Origin: A certified document showing the origin of goods; used in international

commerce.

The invoice and other documents must have the same description of the goods as is given in the

letter of credit

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Export credit in foreign currencies:

Reserve Bank of India has permitted the authorized dealers in foreign exchange to extend export

credit, both pre-shipment and post-shipment, in foreign currencies viz U.S dollars, pound

sterling, Japanese Yen, Euro, etc.

Pre-shipment Export Credit in Foreign Currencies:

Pre-shipment Credit in foreign currency is granted to exporters for purchasing domestic and

imported inputs for goods to be exported. Rate of interest is related to LIBOR/EURO. It is

applicable to only cash exports.

Banks are permitted to extend pre-shipment credit in one convertible currency in respect of an

export order while invoice is prepared in another convertible currency. The risk and cost of

cross-currency transaction will be borne by the exporter.

Sources of Funds for Banks: Banks may grant pre-shipment credit in foreign currency from the

funds raised from the following sources:

Foreign Currency balances available with the banks in different types of accounts, viz. Exchange

Earners Foreign Currency Accounts, Resident Foreign Currency Accounts, Foreign Currency

(Non-Resident) Accounts, and Exporters Foreign Currency Accounts.

Foreign Currency lines of Credit: Banks may arrange lines of credit with overseas banks for this

purpose, provided the rate of interest on such borrowings does not exceed 0.75% over six months

LIBOR/EURO. If it exceeds this limit, approval from Reserve Bank of India is required.

Banks may also arrange lines of credit from other banks in India, if they are not able to raise

loans abroad.

Pre-shipment credit in Foreign Currency is initially granted for a maximum period of 180 days

which may be extended further but an additional interest of 2% is charged.

Such credit is required to be liquidated out of the proceeds of export bills, when they are

submitted for discounting/re-discounting. Export bills are not to be accepted by banks for

collection.

Banks are permitted to extend Running Account facility under PCFC Scheme also, just as is

provided in case of Rupee credit. Such facility should be provided to exporters with good track

record, who should produce L/C or firm orders within a reasonable period of time.

Reserve Bank of India does not provide any refinance against export credit under PCFC scheme.

Post-shipment Export Credit in Foreign Currency:

Exporters are permitted to avail of pre-shipment credit and post-shipment credit either in rupees

or in foreign currency. But if they have taken pre-shipment credit in foreign currency, the post-

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shipment credit has to be necessarily in foreign currency because foreign currency pre-shipment

credit has to be liquidated in foreign currency.

Banks, having discounted the export bills drawn in foreign currencies, are allowed to re-discount

such bills abroad at rates linked to international interest rates at post- shipment stage. For this

purpose, they may arrange a Bankers Acceptance Facility (BAF) for rediscounting the export

bills without any margin and duly covered by collateralized documents.

Each bank can have its own BAF limit fixed with an overseas bank or a rediscounting agency.

The exporters can also arrange themselves a line of credit with an overseas bank or any other

agency for discounting their export bills directly. Bills are to be rediscounted through the bank

from whom pre-shipment credit facility has been availed of.

The above scheme covers mainly export bills with usance period up to 180 days from the date of

shipment including normal transit period and grace period. Demand bills may also be included ifoverseas institution has no objection. Reserve Bank's prior approval is required for bills having

usance of more than 180 days.

Sources of funds for post-shipment export credit are the same as are in case of pre- shipment

export credit in foreign currency. Banks should re-discount export bills with recourse terms. If

they can arrange such facility on competitive terms on without recourse basis, they are permitted

to do so. Reserve Bank of India does not grant refinance facilities against export bills

discounted/rediscounted under the scheme.

Refinance from reserve bank of India:

In order to promote exports from the country and to increase the competitiveness of Indian

exporters, Reserve Bank of India provides refinance to the commercial banks at concessional

rates, in respect of the export credit provided by them. Section 17 (3A) of the Reserve Bank of

India Act, 1934 empowers the Reserve Bank of India to make advances to any scheduled bank

against its promissory notes repayable on demand or on the expiry of fixed periods not

exceeding 180 days, provided a declaration in writing is furnished by the scheduled bank that :

It holds eligible export bills of a value not less than the amount of such loan and

advance, such bills should have usance not exceeding 180 days; or

It has granted a pre-shipment loan or advance to an exporter in India to enable him to

export from India. The amount of such pre-shipment loan drawn and outstanding at any

time should not be less than the advance obtained by the borrowing bank from the

Reserve Bank. The period of pre-shipment credit should not exceed 180 days, which may

be extended, for reasons beyond the control of the exporter.

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Thus Reserve Bank of India provides refinance both in respect of pre-shipment credit and post-

shipment credit. The essential pre-requisite is the submission of a promissory note, supported by

a declaration about having granted export credit.

Extent of Refinance:Reserve Bank of India provides refinance which is linked with the export credit extended by a

bank. With effect from May 5, 2001, scheduled commercial banks are provided export credit

refinance to the extent of 15% of the outstanding export credit eligible for refinance as at the end

of the second preceding fortnight. Thus with the increase in the value of export credit extended

by a bank, the refinance facility also correspondingly increases.

Gold Card Scheme for Exporters:Reserve Bank of India has formulated a Gold Card Scheme for creditworthy exporters with good

track record for easy availability of export credit on best terms. Salient features of the scheme

are as follows:

All creditworthy exporters including those in small and medium sectors with good track

record would be eligible as per the criteria laid down by the banks.

Banks would clearly specify the benefits they would be offering to gold card holders.

Request from card holders would be processed quickly within a prescribed time frame.

`In-principle' limits would be set for a period of 3 years with a provision for stand-by

limit of 20% to meet urgent credit needs

Card holders would be given preference in the matter of granting packing credit in

foreign currency.

Banks would consider waiver of collateral and exemption from ECGC guarantee schemes

on the basis of card-holders credit-worthiness and track record.

Interest Rates on Export Credit:

In order to reduce the cost of export credit to the exporters, so as to increase their

competitiveness in the international markets, Reserve Bank of India has prescribed ceiling rates

for different categories of export credit. Banks are free to charge any rate below the ceiling rates.

Present rates, effective from May 1, 2004, are as follows:

Types of Advances:

Pre-shipment Credit:

Up to 180 days not exceeding BPLR minus 2.5 percentage points

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Beyond 180 days and up to 270 days banks are free to determine rates of interest subject to

BPLR and spread.

Post - Shipment Credit:

On demand bills for transit period not exceeding BPLR minus 2.5 percentage points

Usance bills (for total period) not exceeding BPLR minus 2.5 percentage points

Up to 90 days (maybe extended up to 365 days for eligible exporters) not exceeding BPLR

minus 2.5 percentage points.

Beyond 90 days and up to 6 months from the date of shipment, banks are free to determine

interest rates subject to BPLR and spread guidelines:

Against incentives from Govt not exceeding BPLR minus 2.5%

Against undrawn balance (up to 90 days) not exceeding BPLR minus 2.5%

Against retention money payable within one year from the date of shipment not

exceeding BPLR minus 2.5%

Deferred Credit:

For period beyond 180 days banks are free to determine rate of interest subject to BPLR and

spread guidelines.

When a bank deals in export finance it is bound by the followingguidelines and regulations:

FEMA 1999 rules and acts

FEMA notification

A.P. directives issued by R.B.I

Foreign trade (development and regulation act) EXIM policy

Rules of FEDAI

International commercial rules

Incoterms

Export credit guarantee corporation (ECGC)

Banks own guidelines and circulars

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Import finance:

Import finance is being extended in the following manner.

Establishing letters of credit

Trust receipt loans

Import goods loans

Term loans

Machinery loans

Hypothecation loans

Assessment of import finance:

Payment for imports are made against bills drawn under letters of credit or against bills receivedon collection basis or against advance payment for future imports. Importers bank will be askedto open letter of credit, which may involve financing by the banks. Hence letter of credit must beopened selectively and only for customers of good financial standing. Proper investigation intothe antecedents and respectability of the importer is essential to safeguard any eventuality, which

may arise later on while undertaking import business on behalf of them. Care must be taken bybanks to see that the goods to be imported are easily marketable. In the event of default thereshould be no difficulty in disposing off the goods if the imported goods are easily marketable.

The assessment of economic viability of the import is a guide in assessing whether theunderlying transaction is profitable. In case the importer fails to pay for the bills, it would

become necessary for the bank to release the goods by resorting to sale of imported goods. Theimported goods cannot be sold in all the cases without reference to the licensing authority.Though the consignment can be cleared by the banker in the event of the import bill remainingunpaid; sale of such goods is subject to the approval of the licensing authority, which can be along drawn out process. While assessing the liability of import, it would be necessary to

ascertain and calculate the duty, sales tax, port trust dues etc, on sale of the goods to the third

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party. Banks should satisfy that if facilities are granted, import client would be in a position toretire the documents when received in case port import facility is not granted.

Procedure for opening letter of credit:

After selecting the client as stated in the earlier paragraph, obtaining the required sanction limitfrom the appropriate authorities, a running serial number is allotted to the application and it isentered in a register specified for this purpose. The serial number given to the letter of credit will

be in accordance with the banks procedures.

The letter of credit number, date of opening, name of the correspondent bank, name of thereimbursing bank, percentage of custom duty, other charges letter of credit amount in foreigncurrency and its rupee equivalent, earlier liabilities overdue liabilities under all heads, if any,date of expiry of limit etc. should be written in managers approval from and his approval to beobtained before establishing the letter of credit since the directive of Reserve Bank is that the

payment for import bill has to be given by the head of the branch.

Bank should maintain a register for recording movement of license similar to that of jointcustodian key register.

If the margin money is collected for the letter of credit by debit to customers account or thirdpartys margin, money accepted as security details of the same should be noted in the register.Third partys margin money should be only in the form of cash through the proper bankingchannels and should not be fixed deposit of any other bank. The margin money should becollected before establishing the letter of credit.

Refund of the margin money may be made, if no document is received under the letter of credit,or on obtaining confirmation from the advising bank that the letter of credit is cancelled and

retained at their end duly unutilized.

In the below the documentary credit procedure shown with the help of diagram:

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Scrutiny of letter of credit application form:

Once the limits are sanctioned after observing all the formalities, the prospective importer willtender the application form for establishing the letter of credit. Opening of letter of credit is adefinite commitment given to the beneficiary that the payment for such imports would be madeon submitting the shipping documents in confirmatory to the terms of the credit established bythe bank (article 7 of UCPDC-600). Hence before opening the letter of credit bank shouldensure:

Whether import of goods for which letter of credit is being opened is allowed as per the EXIMpolicy. If so, the relevant provisions or import license details to be mentioned.

Whether credit report of the overseas seller held

Whether the letter of credit application form is signed by the appropriate official of the importerand stamped as prescribed in the Stamp Act of the concerned State in which the branch of the

bank is located. Application form must be completed in all respects.

The application should state whether credit is irrevocable, if it so, whether to be confirmed wherethe beneficiary is located, or whether it is to be made transferable, divisible etc. the applicationmust also state whether the credit must be advised by airmail or by swift etc. if the credit is to beadvised by airmail, whether the brief details of credit has to be sent by swift/ telex. Theapplication should contain full name and address of the beneficiary who must be an overseassupplier, manufacturer or supplier of the goods.

It is advisable to obtain satisfactory status report on the overseas seller or at least overseas sellermust be a well known name in international business before establishing the letter of credit. Forletter of credit above US $ 1, 00,000 or its equivalent it is advisable to call for the credit report of

the supplier/ manufacturer before establishing the credit if they are not internationally knownparties. This information may be obtained from the banks correspondent or from internationallyreputed agency.

Letter of credit should be opened on the basis of underlying contracts. However, in the absenceof contracts/ orders, following documents can be accepted as substitute for sale contracts;

Purchase order duly confirmed

Proforma invoice duly signed by seller and accepted by buyer

Indent or offer from overseas buyer or his authorised agents, either in India or abroad

Sale contracts or Proforma invoice or indent from etc. should contain the following essentialdetails:

Name and address of the seller

Name and address of the buyer

Description of the goods

Quantity and specification

Unit price and value

Terms of payment

Approximate date of shipment

Country/ port of shipment

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Port of discharge of goods

It is advisable to obtain original sale contract and make endorsement for having established theletter of credit with details. If the original sale contract is required by the importer for any reason,

banks may handover the same after retaining the copy for their records. However beneficiary canin no case avail himself of the contractual relationship existing between the banks or between theapplicant and the issuing bank.

Besides calling for standard documents as stated earlier, banks may call for additional documentssuch as certificate of quality, certificate of analysis, inspection certificate etc. depending upon thecommodity being imported to ensure that the goods supplied are good quality one. Over andabove the required copies, banks should call for extra copies of invoices, transport documents fortheir records.

Application calling for the bill of lading or airway bill will specify whether freight is to be paidor is payable at destination depending upon the terms of the contract/ order etc. the letter ofcredit application should also to state the dates for shipment and negotiation. Last date for

shipment should preferably 7 to 21 days before the date of negotiation. Depending upon the typeof shipment, port of shipment, the time gap between the period of shipment and negotiation hasto be ideally stipulated to ensure that such period would take care of the time required for the

beneficiary to submit the documents for negotiation and for the opener to receive the documentsbefore the arrival of the carrying vessel.

Letter of credit should normally stipulate that the bill of lading or air way bill indicates name andaddress of the importer as the notify party and of the bank. The goods are to be consigned in thename of the bank a/c opener.

Insurance risks that are to be covered have to be expressly stated. Vague terms such as usual

risks, customary risks, all risks etc must not be used. Minimum risk to be covered for the purpose of insurance are- Institute cargo clause (all risk), strikes, riots, civil commotions,Institute war clause and theft pilferage non delivery clause. Specific cover may also be includeddepending upon the nature of goods.

If the insurance is covered by the opener, bank should ask the opener to submit open policy orprovisional cover note which should be taken out in the name of bank a/c opener. Where goodsare subject to transshipment, the insurance cover should provide cover for the transshipment risk.

Commission and charges:

Commission, commitment charges, out of pocket expenses, stamp charges etc. for establishingthe letter of credit should be collected upfront only, as per FEDAI rules, as per bank scale ofcharges. These charges once collected normally cannot be refunded without the prior approval ofthe competent authority of the bank. Calculations of commission, charges etc should be recordedin the appropriate register for easy verification by the inspecting officials.

Scrutiny of bills received under letter of credit:

When bills are received under the letter of credit established by the bank, the same shouldbe stamped with, date and time. Recording time is very important to establish whether the

documents are received during the business hours or later. The issuing bank shall have areasonable time not exceeding seven banking days following the date of receipt of the

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Whether the shipment date is within the date stated in the letter of credit

Description of goods is not inconsistent to that described in the invoice as well as the quantity ofgoods loaded.

Ensure that the bill of lading is signed by the appropriate authority

Check whether bill of lading indicated whether the goods have been loaded on board or shippedon a named vessel.

Check for all the original bills of lading are listed and received with the documents

Check whether goods have been consigned as per letter of credit clause and if goods areconsigned to the order of shipper whether the shipper has endorsed the bill of lading or not.

Airway Bill:

If a credit calls for an air transport documents ensure that:

It appears on its face to indicate the name of the carrier and to have been signed orotherwise authenticated by the carrier or a named agent for or on behalf of the carrier.

Airway bill should indicate that the goods have been accepted for carriage.

Where credit calls for an actual date of dispatch, indicates on specific notation of suchdate, the date of dispatch so indicated on the air transport document will be deemed to bethe date of shipment. In all other cases, the date of issuance of the air transport documentwill be deemed to be the date of shipment

Whether freight prepaid or to be paid depending on the terms of the credit

Insurance:

Documents should be issued and signed by insurance companies or underwriter or theiragents

Whether all the originals have been listed and received

Date of the issuance of policy is not later than the date of loading on board or dispatch ortaking charge as indicated in such transport documents.

Insurance documents expressed in the currency of letter of credit

Other documents:

If credit calls for an attestation of certification of weight in the case of transport other than bysea, banks will accept a weight stamp or declaration of weight which appears to have beensuperimposed on the transport document by the carrier or his agent unless the credit specificallystipulates that the attestation or certification of weight must be by means of a separate document.

Rejection of documents:

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After examination of the documents received under the credit if found that they are not inconformity of the credit terms, has to be rejected and rejection to be communicated to the sender/negotiating bank without delay not later than close of seven banking days listing all theirregularity / discrepancies and seeking their further disposal instruction.

If negotiating bank had already claimed the reimbursement in terms of credit arrange to claim therefund from the negotiating banker, if no reply received within 60 days, such document shall bereturned to the sender, and pursue for the refund.

Refusal of documents under letter of credit:

Once the documents are refused by the opener, they should inform the forwarding banker aboutthe refusal furnishing the details of irregularity observed by them in the documents at the firstinstance itself and should hold the documents at the risk of the sender seeking their furtherinstruction about the disposals.

Acceptance of discrepant documents:

When documents received under credit are not in conformity of the credit, opener on informingthe negotiating bank in terms of UCPDC 500/ 600, will normally inform the applicant also inwriting and also seek their advice. If opener is willing to waive the discrepancies and willing toretire the bills or to accept the bill for future payment, then the banker should claim suchwillingness in writing provided discrepancies are not violating EXIM policy / Reserve Bank ofIndia directives. An intimation of acceptance should be communicated to the forwarding bankerand release the documents on obtaining their approval.

Receipt of bills after arrival of the vessel or goods:

There may be occasions that the import consignment arrives before related documents arereceived. Taking this accept into account banks should take reasonable period between the dateof shipment and date of negotiation. Under such a circumstances bank may issue delivery orderto the importer to enable him to clear the consignment provided.

Undertaking is obtained to retire the documents or to accept the usance draft on its arrival at thecounters of the opener irrespective of any discrepancies.

Full margin money is provided in case of sight bill to meet the obligation under the credit whendocument is received. In case of usance bills under credit, delivery order can be issued againsttrust receipt to make the payment within the usance period from the date of release orderissued or from the date of execution of trust letter or within the specified period of bill of ladingdepending upon the terms of credit.

Whenever the release order issued prior to receipt of documents banker should take additionalcare to trace the documents by contacting the letter of credit advising banker. Release order fortaking delivery of goods shall be noted in the letter of credit registered in red inkto draw theattention of the section officer to recover the dues without waiting for the authorisation from theopener.

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However scrutiny of the document, non receipt of listed documents, forwardingacknowledgement to the negotiating bank etc. to be carried out by the opener except for therejection of documents.

Trust receipt loan:

When goods are imported under usance basis under banks letter of credit, it is an obligation onthe part of bank to deliver the documents to the importer to enable him to clear the goods fromthe customs pending payments. He will be as per terms of stamped letter of credit agreementunder the obligation to make the payment on expiry of the usance period.

Usance period is normally granted by the overseas supplier to the buyer of the goods to facilitatehim to cover the voyage period, clearance time, and arrangement of the inspection, certification,and transportation time for taking goods to his factory / godown which is normally located awayfrom arrival point of goods. Such delayed payment to the supplier of goods is known under tradeterminology as usance period, for which normally there will be charges on the importer which iscalled usance interest. The payment of interest for such delayed payment is permitted under the

commercial trade and has approval of the Reserve Bank of India provided the interest amount isrestricted to Libor + 50 basis period up to one year and Libor +125 basis point for periodexceeding one year but within 3 years.

Import loan:

Whenever customers have been granted post import facilities, such as import/ goods loan underdomestic limits, the import bills may be retired and transferred to import loan immediately onreceipt of documents following normal procedures. In such cases, customer should arrange forcustoms duty and any other charges to the customs authorities directly out of their own fundsthrough the bank who entrusted the clearing work of the goods through their approved clearing

agent.

Under the import loan system the imported goods are held under the custody of the bank at thelanded cost of goods less stipulated margin. Landed cost means, CIF value of goods converted atthe appropriate bill selling rate on the day of crystallizing the bill+ custom duty+ taxes+ harbordues+ cl