INDEX

SR NO SUBJECT PAGE NO

1INTRODUCTION TO INTERNATIONAL

BANKING2-15

2

FACTORS INFLUENCING THE

EVOLUTION OF INTERNATIONAL

BANKING

16-18

3 MODES OF INTERNATIONAL BANKING 19-22

4FUNCTIONS OF INTERNATIONAL BANKS

23-31

5CONCLUSION

32-34

0

EXECUTIVE SUMMARY

An earnest attempt is made to present the concepts and contents of international

banking. This project is exhaustive in contents and primarily covers the basic

working and function of international banks.

International banking is ever evolving as the world is now confronted with

dynamics of an international meltdown and the need to evolve an international

consensus to sustain the growth of the developed and developing nations of the

world, be it to the G-7, 8 or 20. Social, political and economic compulsions ordain

a broader convergence and international order in banking with renewed thinking

for international financial architecture.

1

CHAPTER1. INTRODUCTION TO INTERNATIONAL

BANKING

International banking can be referred as a subset of commercial

banking transaction and activity having a cross – border and / or cross currency

element.

International Banking is a process that involves banks dealing with money and

credit between different countries across the political boundaries. It is also known

as Foreign/International Banking. In another words, International Banking involves

banking activities that cross national frontiers. It concerns the international

movement of money and offering of financial services through off shore

branching, correspondents banking, representative offices, branches and agencies,

limited branches, subsidiary banking, acquisitions and mergers with other foreign

banks. All the basic tools and concepts of domestic bank management are relevant

to international banking. However, special problems or constraints arise in

international banking not normally experience when operating at home.

Banking system came along with the development of money as an institution. The

transaction of commodities across required financial intermediation in the

international level and thus international banking business was born. International

banking operations are essentially to facilitate the movement of goods across the

political boundary of countries.

In this way, the emergence and growth of international banking is closely

interwoven with the development of international trade and international capital

movement.

2

Before World War I when European banks denominated the world capital market,

during the period 1940 – 1960, regulatory control on capital flow and convertibility

of the currencies reduced the importance of international banking.

From 1960 onwards globalization of capital market started and it helps in

expansion of international banking in today’s scenario.

The major business of international banks is based on international trade,

international transfer of capital and money and derivatives.

3

History of international banking

The origin of international banking dates back to the 2nd century BC when

Babylonian temples safeguarded the idle funds and extended loans to merchants to

finance the movements of goods. The loans extended by the Florentine banking

houses were the first instance of international lending.

During the nineteenth century many innovations were witnessed in the

international lending, leading to trade financing and investment banking. Trade

financing started as short term lending. Of the two investments banking accounted

further great bulk of the international lending and financial companies acted as

agents or underwriters for the placement of funds.

By 1920, American banking institutions dominated international lending, and the

European nations were the major borrowers. There was perfect international

banking system existing till the time of First World War. The Bretton system had

installed a secured financial framework and revolutionized the economic life by

creating a global shopping center. International banking speeded up after the first

oil crisis in 1973. Progress in the telecommunications sector across the world

supplemented the growth of international banking.

4

Difference between domestic and international banking

1. Boundaries

Domestic banks work within the boundary of a one single country while

International banks can work in as many countries as they want.

2. Jurisdiction

Domestic banks work according the jurisdiction of one single country while

International bank’s different branches face different jurisdictions.

3. Taxes

Domestic banks come under all the taxes imposed by central bank of the country

while international banks are not subject to these as they come under World Bank.

4. Risk

International banks might be able to diversify risk better, allowing them to

undertake higher risk, but also higher return investments than the domestic banks.

5. Deposits

International banks offer more interest on the deposits as compared to the domestic

banks.

6. Loans

International banks charge less interest on the loans as compared to the domestic

banks.

7. Foreign services

5

International Banks are capable of foreign services while domestic banks can not

practice any foreign services.

8. Customers

Domestic banks serve only domestic customers while International banks can serve

the customers from any part of the world.

6

Features of international banking

1. Currency risk:

International banks operate in different currencies. Currencies may weaken or strengthen with respect to each other. According wealth value of the bank may vary. This is a significant sensitive aspect in international arena.

2. Complexity of credit risk:

Credit risk has additional dimension of sovereign – political risk and also socio- culture factor about honoring credit

3. Competition for market share among banks:

Competition is stiff because of presence of many giant bankers. This in effect reduces margins and demands highly efficient performance.

4. Cyclical nature, with periodic crises:

World economies are not moving in unison. Cycles of growth and recession move from one continent to another. Multinational banks face these waves and also occasional crises such as crash of an economy.

5. Competition for bank loans from the international band market:

Threat of disintermediation is more because international banking has many big value transactions which may eventually bypass banks. Bond market is matured in developed countries, even for foreign currency denominated bonds

7

6. Importance of international interbank market (IIBM) as source of liquidity and funding for banks:

Interbank transactions in multiple currencies are common in international banking. In effect bankers enjoy better liquidity solution.

7. Role of risk management activities (swap, option, futures):

Being in forex market, banks deal with additional hedging instruments such as currency futures\ option, etc.

8

Reasons for Engaging in International Banking

Banks undertake international operations in order to expand their revenue/profit

base, acquire resources from foreign countries, or diversify their activities. Specific

reasons expanding operations abroad include the saturation of domestic market;

discovery of lucrative opportunities in other countries; desire to expand volume of

operations in order to obtain economy of scale. There are number of explanations

or theories provided to support the growth in international banking operations.

International banking theories explain the reasons behind the banks choice of a

particular location for their banking facilities, maintaining a particular

organizational structure, and the underlying causes of international banking.

1. Low marginal costs –

Managerial and marketing knowledge developed at home can be used abroad with

low marginal costs.

2. Knowledge advantage –

The foreign bank subsidiary can draw on the parent bank’s knowledge of personal

contacts and credit investigations for use in that foreign market.

3. Home nation information services –

Local firms in a foreign market may be able to obtain more complete information

on trade and financial markets in the multinational bank’s home nation than is

otherwise obtainable from foreign domestic banks.

4. Prestige –

Very large multinational banks have high perceived prestige, liquidity, and deposit

safety that can be used to attract clients abroad.

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5. Regulation advantage-

Multinational banks are often not subject to the same regulations as domestic

banks. There may be reduced need to publish adequate financial information, lack

of required deposit insurance and reserve requirements on foreign currency

deposits, and the absence of territorial restrictions (that is, U.S. banks may not be

restricted to state of origin).

6. Wholesale defensive strategy –

Banks follow their multinational customers abroad to prevent the erosion of their

clientele to foreign banks seeking to service the multinational’s foreign

subsidiaries.

7. Retail defensive strategy-

Multinational banks prevent erosion by foreign banks of the traveler’s check,

tourist, and foreign business market.

8. Transaction costs –

By maintaining foreign branches and foreign currency balances, banks may reduce

transaction costs and foreign exchange risk on currency conversion if government

controls can be circumvented.

9. Growth –

Growth prospects in a home nation may be limited by a market largely saturated

with the services offered by domestic banks.

10

10. Risk reduction-

Greater stability of earnings is possible with international diversification.

Offsetting business and monetary policy cycles across nations reduces the country

specific risk of anyone nation.

11

Advantages of international banking

1. International trade

Main advantage of the International banks is that they facilitate in the international

trade. Since international trade is closely related to international banking, volume

of international trade (imports and exports together) can be increased by the help of

international banking.

2. Foreign exchange

International banks by having access to many countries are pretty helpful in the

matters regarding the foreign exchange.

3. Regulatory advantage

Multinational banks are often not subject to the same regulations as domestic

banks. Because these banks are controlled by World Bank they free from some

domestic regulations of a specific country.

4. Prestige

Very large multinational banks have high perceived prestige, which can be

attractive to new clients. People usually prefer more the things which are

multinational.

 

5. Access to international financial markets

A distinct advantage of International bank is the access to International financial

markets which can be helpful in predicting the future financial outcomes.

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6. Growth

Foreign banks may offer opportunities to growth not found domestically. So they

can play a very important role in the growth of an economy.

7. Risk reduction

Greater stability of earnings due to diversification reduces the amount of risk

which can be a threat in the case of domestic banks.

8. Remote access

Moving domestic customers can remotely access the financial services of an

international bank for many country having branches of that bank.

9. Increased inter-bank competition

Entry of international banks increases the inter-bank competition; the public gets

the better services with increased efficiency.

10. Enhanced efficiency

International bank’s entry increases market discipline, the efficiency of domestic

banks, and thereby financial intermediation, and the supply of credit.

11. Latest financial technology

Foreign banks introduce the latest financial technologies which are yet to be

adopted by the local banks of the economy.

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Disadvantage of international banking

1. Terrorist funding

 As International banks serve people from all over the world, so they can be a part

of terrorist funding without realizing it.

2. Regulation

Regulations in certain countries may limit the activities of foreign banks relative to

domestic banks in those countries.

3. Exchange rate changes

The exchange rate changes affect the activities of the foreign banks. An increased volatility of

the exchange rate increases the risk factor in international banking, and unless this aspect is

properly taken care of, this acts negatively so far as the growth of international banking is

concerned

4. No federal governance

Unlike the domestic banks, International banks have no federal governance of the

country which can be risky for them.

 

5. Unfamiliarity with the host economy

International banks may have less information compared to local banks on how to

do business in the host country, putting them at a disadvantage, at least until they

have been in the country for some time.

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6. Safety risk

Furthermore, international banks might face some risks related to the safety issues

in particular countries as they are from some other countries.

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CHAPTER2. FACTORS INFLUENCING THE EVOLUTION OF INTERNATIONAL BANKING

1. Gold standards and the effect of World War II:

The gold standard was a monetary system in which a regions common media of exchange was paper notes that are normally freely convertible into preset, fixed quantities of gold. The gold standard is not currently used by any government, having been replaced completely by fiat currency, and private currencies backed by gold are rare. Under the gold standard, a free banking system stands as the protector of an economy stability and balanced growth. Even the US government, which possessed most of the worlds gold, moved to cushion the effects of the great depression by raising the official price of gold (from about $20 to $35 per ounce) and thereby equilibrium price level in 1933 – 34All international economic activities were paralyzed after the World War II. This also affected the global economic growth adversely. So, during post world war, all nations concentrated on reconstructing and restructuring their respective economies. The world war had devastating effects on these economies. The warring nations suffered huge damage from war and also hyper inflation.

2. Failure of Bretten Woods Conference:

In 1944 representatives of 44 countries met in Bretton Woods and signed an agreement to establish a new monetary system (as the trends in the old one revealed imbalance in the monetary resources) which would address all their needs this system was called: The Bretton Woods System”. A fixed exchange rate system was established off with the provision of changing them if needed.

In pursuance of this fixed exchange rate systems regimes, each country agreed upon a certain par value for its currency measured either in terms of gold or in US dollar and the par value of dollar was fixed at $35 per ounce of gold. The central bank of each country was obliged to interfere in the foreign exchange marked by buying or selling against the local money. The member countries had the option of pegging their currency either gold or the dollar; they had to maintain gold reserves. The system provided for realignment of exchange rate in respect of fundamental disequilibrium in 1967 Britain devalued its currency. In 1968 there was an outflow of capital from France due to political disturbances. In 1969, French franc

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devalued. With German devaluation the system failed in 1970. All these led to the collapse of the Bretton wood system by 1970.

3. Integration of world market:

Abundance of resources at one place and scarcity at another place is the basic cause of trade. These circumstances called for transfer of resources to far away countries to optimize the final output. The integration of market gave the freedom and opportunity to rise funds and invest then anywhere in the world. Though the threadworm of operations differs from country to country however in were of such freedom anything affecting to find market in one part of two world automatically and quickly affects the test of the world also the reasons for these integration have seen the growth of technology for reduced cost and at a faster pace. This has resulted in co-ordination between the financial centers even across the national boundary, the inflationary pressures in the world market and lead to the demand for movement of goods and services, the development of new financial instruments namely Euro dollar markets, interest rate currency swaps, futures, options etc.

4. Oil Crisis.

In the year 1973, Arab members of the OPEC (Organization of Petroleum Exporting Countries) declared that petroleum will not be supplied to those countries that supported “Israel” when there was a conflict between Israel and Egypt. The main supporters of Israel were the USA and its allies in western Europe. During the same time the OPEC member states agreed to leverage the issue by increasing the oil prices by four times. Consequently the oil price soared up and dollar 3.65 a barrel which went up to dollar a 80 a barrel by 1980 had affected USA the most as the USA consumed more than 33% of the world oil. The oil consumption other US doubled between 1950 and 1974. The USA consequently released the dollar from gold standard that had controlled its worth and the convertibility of dollar was suspended in 1971. The dollar was devalued in 1971 and 1973 this action of the USA lead to more uncertainty in the world both in economic and political concerns for the world.

5. Globalization of Economy/ Liberalization.

Globalization in the integration of various markets of the world into an international market. Globalization of finance markets in the integration of the world into an international finance market. It has eliminated the restriction on

17

potential issues and investors confining their utility boundaries to their national boundaries. Integration of finance markets has been influenced by deregulation or liberalization of markets and the activities of market participants in key finance centers of the world.Globalization effect is seen in the volatility of interest rate exchange rate, price of finance assets, etc and the most significant liberalization measures was lifting of exchange control in France, UK and Japan. Domestic borrowers were allowed to access to foreign finance markets.Deregulation involved the elimination of segmentation of the markets for finance services with specialized institutions. It also involved permitting foreign financial institutions is offering finance services in the stock exchanges of New York and London. Various non-resident firms were listed and globalization and liberalization lead to a great amount of cut-throat competition in the finance services industry failing of spread/ margins.

6. Concern of Balance of Payments and Trade:

The evolution in the international balance of payments and balance of trade has made the world to fine tune not only their import and/or exports but also to evolve with better banking and financing in the new world order.

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CHAPTER3. MODES OF INTERNATIONAL BANKING

There are a lot of available methods for entry into international banking

Operations. This include; Correspondent Banks, Representative Offices, Branches

and Agencies, Limited Branches, Subsidiary Banks, Bank Acquisitions and Bank

Mergers.

1. Correspondent Banks

In order to adequately provide needed international banking services, commercial

banks establish a network of foreign correspondent banks to supplement their own

facilities worldwide. Frequently, the expense of establishing a related banking

entity, such as overseas branch, is not warranted due to the low volume of

transactions concluded for the banks’ international clients. Therefore, to provide

services while keeping costs minimal, account relationships are developed with

foreign banks to facilitate international payment mechanisms between the

institutions. Deposit accounts are opened at the correspondent banks, which enable

them to make direct payments overseas by means of debiting and crediting the

respective accounts with settlement to be made at a later date. Such accounts are

termed due to (or nostro) accounts and due from (or vostro) accounts on the bank’s

books. In addition to payment accounts, correspondent bank relationship facilitates

transactions such as letters of credit, documentary collection, foreign exchange

services, and loan services for a bank’s international clients. Thus, the

correspondent bank relationship gives the domestic bank a presence in overseas

markets, which permits international transactions to be concluded.

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2. Representative Offices

A representative’s office is both the most commonly used and the most limited in

function of all foreign banking operating internationally. The international

representative office functions mainly as liaison between correspondent banks and

the parent bank. Representative offices are usually prohibited from engaging in

general banking activities, although they may receive checks for forwarding to the

home office, solicit loans for the home office, and develop customer relations.

However, they may not receive deposits or make loans. Generally, representative

offices serve as the preliminary step to other forms of banking activity since they

are a relatively inexpensive means of establishing a presence in a new location.

3. Branches and Agencies

Depending upon the extent of services that the institution wishes to offer, either a

branch or an agency may be established. The basic definition of “branch” and

“agency” may be found in the U.S. International Banking Act of 1978. A branch is

any office of a foreign bank at which deposits are received. On the other hand, an

agency is any office at which deposits may not be accepted from citizens or

residents of the U.S. if they are not engaged in international activities, but at which

credit balance may be maintained. Thus, the principal difference between branches

and agencies is that agencies cannot accept deposits for U.S citizens or residents

and can only maintain credit balances related to their international activities. In

addition, agencies cannot engage in either fiduciary or investment advisory

activities with the exception of acting as custodians for individual customers.

Agencies do engage in a variety of activities to finance international trade, such as

the handling of letters of credit. Both agencies and branches are principally active

in international market.

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As extensions of the foreign parent bank, branches are generally subject to more

stringent state regulation than agencies due to the more extensive nature of their

operations. The powers of a federal branch are similar in scope of those of a

national bank; these branches possess full deposit-taking, loan, and commercial

banking powers in addition to other trust powers. They are also subject to duties,

restrictions, and limitations similar to those of a national bank organized in the

same area.

4. Limited Branches

In pursuant to the International Banking Activities, an additional means by which a

foreign bank may participate in foreign banking market is through a so-called

limited federal branch. Basically, this is an office chartered by the Comptroller of

the Currency subject to the condition that the foreign bank enter into an agreement

with the country’s apex bank or regulatory authorities restricting the branch’s

deposit-taking activities to those permitted by law. Since this office may be

established outside the foreign bank’s home state, they are restricted to deposit

taking activities of an international nature.

5. Subsidiary Banks

Foreign banks gain control of subsidiary banks by establishing new institutions or

by acquiring existing domestic banking institutions and these subsidiaries generally

may engage in a full line of banking activities. With respect to the designation of a

foreign bank subsidiary, the term “bank” and subsidiary” has the same meaning as

those provides by section 2 of the Bank Holding Company Act (BHCA). A

subsidiary bank of a foreign bank may be either a national or a state bank. State

banks are governed by the laws of the state in which they are located, while

national banks are chartered by the Comptroller of the Currency under the National

21

Bank Act. In United States for example, although foreign ownership is not

restricted, non-U.S. citizens may not form a majority of a national bank’s Board of

Directors.

6. Bank Acquisitions

Firms willing to gained access to international banking operations may also adopt

the acquisition approach by acquiring indigenous or domestic banks. However, the

acquisition process is guided by stringent conditions. For instance, Under the

United States Bank Holding Company Act, the Federal Reserve Board must

approve the acquisition of direct or indirect control of a U.S. bank by a domestic or

foreign bank holding company. Various factors are considered in the approval or

denial of a BHC application. These include analysis of the competitive effect of the

acquisition, the acquirer’s financial and managerial resources, and future prospects

of the bank being acquired, community needs, and the applicant’s organizational

structure.

7. Bank Mergers

Bank mergers are another option that is opened to those who wishes to provide

international banking services in foreign countries. There are several reasons for a

foreign bank merging with a domestic bank. For example, this provides an

expedient and economical means of expanding into new markets; it becomes easier

to establish an identity on a state-wide basis; and the bank is able to continue

smooth operations with experienced management and personnel.

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Chapter4. FUNCTIONS OF INTERNATIONAL BANKS

Role of international banking in developing country

While in foreign developing countries, international banks besides performing the

usual commercial banking functions play an effective role in their economic

development. These roles include the followings.

1. Mobilization of Savings for Capital Formation

International commercial banks help in overcoming savings through a network of

branch banking. People in developing countries have low incomes but the banks

induce them to save by introducing varieties of deposit scheme to suit the needs of

individual depositors. They also mobilize idle savings of the few rich. By

mobilizing savings, the banks channel them into productive investments. Thus,

they help in capital formation of a developing country.

2. Financing Industry

The international commercial banks finance the industrial sector. They provide

short time, medium-term and long-term loans to industries. Besides, they

underwrite the shares and debentures of large scale industries. Thus, they not only

provide finance for industry but also help in developing the capital market, which

is underdeveloped in such countries.

3. Financing Trade

The international commercial banks help in financing both internal and external

trades. The banks provide loans to retailers and wholesalers to stock which they

deal. They also help in the movement goods from one place to another by

providing all types of facilities such as discounting and accepting bills of

23

exchange. Moreover, they finance both exports and imports of developing

countries by providing exchange facilities to importers and exporters.

4. Financing Agriculture

The international commercial banks help the large agricultural sector in developing

countries in a number of ways. They provide loans to traders in agricultural

commodities. They provide finance directly to agriculturists for the marketing of

the modernization and mechanization of their farms, for providing irrigation

facilities and for developing lands. Help in Monetary Policy: The international

commercial banks help in economic development of a country by faithfully

following the monetary policy of the country’s central bank. In fact, the central

bank depends upon the commercial banks for the success of its monetary

management in keeping with requirement of a developing economy.

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International banks functions (product and services) - in India

The international banking services in India are provided for the benefit of Indian

customers, corporate, NRIs, overseas corporate bodies, foreign companies/

individual as well as foreign banks etc.

The product and services offered by different banks are:

1. NRI banking

2. Foreign currency loan

3. Finance/ service to exporters

4. Finance/ service to importers

5. Remittances

6. Forex and treasury services

7. Resident foreign currency (domestic) deposits

9. All general banking services

1. NRI banking.

The international bank provides the service to the NRI customer by providing the

loan and remittance and accepting the deposits like

a) Foreign currency nonresident (FCNR-B) deposits:

Overseas earnings remain fully repatriable in an FCNR (B) deposit account.

b) Resident foreign currency (RFC) deposits:

Returning Indians for permanent settlement, after staying abroad for not less

than one year,

Can retain their savings in foreign currency in a RFC account.

Get the proceeds of FCNR (B)/NRE deposits credited to this account.

25

Get the earning out of dividend/sale proceeds of assets left abroad as well as

pension received from overseas credited in this foreign currency account.

c) Nonresident external (NRE) deposits:

NRE deposits can be placed with,

Saving bank a/c

Fixed deposit a/c

d) Nonresident ordinary (NRO) deposits;

NRO account may be opened in the following manner:

Where an Indian citizen having a resident account leaves India and become

nonresident, his resident account should be designated as NRO account.

Where non- resident Indian receives income in India, he can open a NRO a/c

with such funds.

2. Foreign currency loans.

a) In India (FCNR B loans):

The foreign currencies denominated loans in India are granted out of the

pool of foreign currency funds in FCNR (B) deposit etc. accounts.

These loans are denominated in foreign currency such as US dollars and are

offered as short term loans.

b) From outside India:

With presence internationally, bank has foreign resources to arrange/ grant

foreign currency loans to India as well as multinational corporate at the

competitive rates.

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The foreign currency denominated loan are granted by overseas branches to

Indian corporate as per external commercial borrowing (FCB) policy of

Govt. of India/RBI.

3. Finance/service to exporters.

a) Rupee export credit (pre-shipment and post-shipment):

Many banks provide both pre and post shipment credit to the Indian

exporters through rupee denominated loans as well as foreign currency loans

in India. Exporters having firm export credit facilities.

Rupee export credit is available generally for a period of 180 days from the

date of first disbursement. In deserving cases extension may be permitted

within the guidelines of RBI.

b) Pre-shipment credit in foreign currency (PCFC):

Banks offers PCFC in foreign currency to the exporters enabling them to

fund their procurement, manufacturing/processing and packing

requirements. These loans are available at very competitive international

interest rates covering the cost of both domestic as well as import content of

the exports.

PCFC is generally available for a period of 180 days from the date of first

disbursement. In deserving cases extension may be permited within the

guidelines of RBI.

c) Negotiation of bills under L/C – letter of credit:

Authorized forex branches are active in negotiation/ discounting of sight/

usance international export bills under L/Cs opened by foreign banks as well

as branches of Indian banks abroad.

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d) Export bill rediscounting:

Bank; provide financing of export by way of discounting of export bills, as

post shipment finance to the exporters at competitive international rate of

interest.

e) Bank guarantees:

Bank on behalf of exporters constituents, Issues guarantees in favor of

beneficiaries abroad. The guarantees may be performed and financial.

4. Finance/service to importers

a) Collection of import bills:

Local bank has correspondent relationship with reputed international banks

throughout the world and can thus provide valuable services to importers

who may be importing from any part of the global. The import bills are

collected by authorized forex branches at very competitive rates. The import

bills drawn on customers of other branches are also collected through these

branches.

b) Letter of credit:

On account of bank reputation in international market L/Cs of banks are well

accepted in the international market.

L/C facility is for the purchase of goods/services etc. fulfills the

requirements of all importers to arrange a reliable supply. Banks offers this

facility to importers in India within the ambit of FEMA and exim policy of

Govt. of India.

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Bank uses state of the art SWIFT network to transmit L/C and with a

worldwide network of correspondents and overseas branches facilitates

prompt & efficient services to the importers.

L/C facility is granted to the importers on satisfying credit exposure norms

of the bank.

c) Financing of import:

Usance L/C facility

Provides the importer an opportunity to avail credit from their suppliers/

supplier’s bank.

Rupee finance

For payment of goods and services imported from abroad.

Foreign currency loans

Short term external commercial borrowings or trade credit for less than three

years as permitted by RBI for import into India is allowed by overseas

branches to Indian importers. These are generally backed by L/Cs opened by

importers bank. Indian importers can also avail this facility from overseas

branches as roll- over credit on their bank agreeing to extend the L/C in

favor of our overseas branches.

d) Bank guarantees:

On behalf of importers constituents or other customer’s bank can issues

guarantees in favor of beneficiaries abroad. The guarantees may be both

performance and financial.

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5. Remittances

Through its worldwide network of correspondents, Indian branches and

overseas branches, banks offer prompt inward and outward foreign

remittance facilities. The use of SWIFT networks adds to reliability and

efficient handling.

6. Forex and treasury services

Banks operates in the forex market in India as well as abroad.

Deals in all the important international currencies. Forex treasuries generally

undertake the following treasury related activities:-

Forex interbank placements/borrowing

Sale and purchase of currency on behalf of customers

Forward cover bookings

Cross currency swaps

Interest rate swaps (IRS)

Forward rate arrangements (FRAs)

Forex money market operations

Forex service for corporate.

To improve the standard of service to the valued clientele, the banks have

integrated forex corporate services.

Corporate forex services include foreign currency sale and purchase,

forward booking, and cross currency forward etc. other products like

collection and negotiation of export and import bills under LC, LC issuance,

advising and confirmation services, and arrangement of trader credit, the

guarantees on behalf of Indian corporate/projects, EEFC accounts, and

remittance etc. are all available to corporate customers.

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7. Resident foreign currency (domestic) A/Cs

To resident individuals in India, the facility to open non-interest bearing

current account in foreign currency at the selected Indian branches as

permitted by RBI. Joint accounts with a resident eligible to open RFC (D)

account are permissible. Nomination facility is also permitted.

CHAPTER5. CONCLUSION

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International banking has expanded markedly over the last 30 years. Its form and

geographical coverage reflect two important aspects of the role international banks

play in the global economy.

First, international banking has been an important component of a broader process

of financial globalization and integration. Historically, it has expanded in concert

with international trade and has performed key functions for the business of

international firms. In addition, the local operations of foreign banks have spurred

the development of financial systems in emerging markets and helped to alleviate

information problems via close and sustained customer relationships.

The demand for financial services from multinational corporations and rapidly

growing emerging markets promises to shape international banking and its

contribution to economic progress in the future. A shift of trade flows and

multinational production towards emerging market economies may accelerate

financial integration. This could result in both increased participation in these

economies by foreign banks and greater international activity by locally

headquartered banks. Thus, banks from emerging market countries may well play

an increasingly prominent part in future cross-border consolidation in the financial

sector.

Second, the role of international banks in the global economy is closely related to

that of international financial markets. As they perform complementary functions,

both forms of financial intermediation are indispensable, together with a resilient

market infrastructure, for the healthy functioning of the financial system. Deep

international capital markets often ease the funding strains of large corporations

when bank credit contracts.

International banks established in India since independence. Today all major

international banks have operations in India. International banks are governed by

applicable banking laws. In addition, they also fall under purview of FEMA.

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With globalization, more and more foreign banks would get entry in India. Also,

major Indian nationalized and private banks have overseas operations and

branches.

It is important that international banking has wider spread across India without any

hurdles because it a need of the industry and desired growth. Following factors

highlight the need and importance:

1. India poised to be the third largest in public private partnership PPP bt the year

2025. PPP solicits participation of private sector enterprises in infrastructure

development. Infrastructure was so far the monopoly and responsibility of the

government. Private sector participation requires greater role of banks in this

process. In PPP India is only behind US, china and Japan.

2. India has sixth largest in foreign exchange reserves

3. India is haven for techno- MNCs – third biggest market for computer goods,

cellular industry CAGR- 35%, which is highest in Asia pacific and Japan.

4. Internationally acknowledged base for ITES segment.

5. Identified hub for auto component industry.

6. Foreign corporate in outright acquisitions, M&As and JVs

7. Indian conglomerates on foreign acquisition spree. Tata’s and others have

acquired international firms.

8. Vast industries & services infrastructure

Although the performance of banks when entering a foreign country has received

ample attention in the literature, results found so far were far from univocal. In

some cases foreign banks performed better compared to domestic banks while in

other cases the reverse was found. This study reconciles these differences by

showing that a number of factors importantly contribute to the relative

performance of a foreign bank. This study found strong evidence that the level of

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development in the home country, the competitiveness of the financial sector in the

host country, the geographical and cultural distance between home and host

country and certain bank characteristics are important determinants for the

profitability of a foreign bank. Our results suggest that when studying the behavior

of foreign banks they should not be looked upon as a homogeneous group. They

indicate that banks from certain countries and with certain characteristics will be

better equipped to operate in foreign countries. Characteristics like size, age and

funding structures can influence foreign bank’s profitability. Furthermore, being

from a home country that is closer or highly developed and/or entering a country

with limited competition has some advantages. These findings have implications

for the shape of the world’s financial sector going forward. The advantages of

large foreign banks may mean a further consolidation of international banking

systems. At the same time, the origin of banks crossing borders may change over

time. With a number of emerging markets becoming more and more similar to

high-income countries and realizing that being geographical and cultural close is a

major asset in cross-border banking, it might well be that in the future banking

groups from these countries will start to play an increasingly important role,

especially in other developing countries.

BIBLIOGRAPHY:

Websites

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www.wikipedia.com

www.investopedia.com

Books

International banking and finance- Dipak Abhyankar

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