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A negotiable instrument is a document

guaranteeing the payment of a specific

amount of money, either on demand, orat a set time. There are three types of

negotiable instrumentsi.e., promissory

note, bill of exchange and cheque.

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Promissory note

A negotiable promissory note is

unconditional promise in writing made by

one person to another, signed by the

maker, engaging to pay on demand to

the payee, or at fixed or determinablefuture time, sum certain in money, to

order or to bearer.

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Bill of exchange A bill of exchange or "draft" is a written order by the drawer to the drawee to

pay money to the payee. A common type of bill of exchange is the cheque

(check), defined as a bill of exchange drawn on a banker and payable ondemand. Bills of exchange are used primarily in international trade, and are

written orders by one person to his bank to pay the bearer a specific sum on a

specific date

It is essentially an order made by one person to another to pay money to a third

person.

A bill of exchange requiresin itsinception three partiesthe drawer, the

drawee, and the payee.

The person who draws the bill is called the drawer. He gives the order to pay

money to third party. The party upon whom the bill is drawn is called the

drawee. He is the person to whom the bill is addressed and who is ordered to

pay. He becomes an acceptor when he indicates his willingness to pay the bill.

(Sec.62) The party in whose favor the bill is drawn oris payable is called the

payee.

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The parties need not all be distinct persons. Thus,

the drawer may draw on himself payable to his own

order.

A bill of exchange may be endorsed by the payee in

favour of a third party, who may in turn endorse it to

a fourth, and so on indefinitely. The "holderin due

course" may claim the amount of the bill against the

drawee and all previous endorsers, regardless ofany counterclaims that may have disabled the

previous payee or endorser from doing so. Thisis

what is meant by saying that a bill is negotiable.

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Cheque

A cheque (Commonwealth English) or check

(American English) is a negotiable instrument

instructing a financial institution to pay aspecific amount of a specific currency from a

specified demand account held in the

maker/depositor's name with that institution.

Both the maker and payee may be naturalpersons or legal entities.

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Types of cheques

A cheque used to pay wages due is referred to as a payroll

cheque or by some government entities to their employees,

beneficiants, and creditors, are referred to as warrants.

A traveller's cheque is designed to allow the person signing it tomake an unconditional payment to someone else as a result of

paying the account holder for that privilege. Traveller's cheques

can usually be replaced if lost orstolen, they are often used by

people on vacation instead of cash.

A chequesold by a po

st off

ice or merchant

such a

sa groceryfor payment by a third party for a customeris referred to as a

money order or postal order.

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Types of cheques

A cheque issued by a bank on its own account for a customer

for payment to a third party is called a cashier's cheque, a

treasurer's cheque, a bank cheque, or a bank draft. A cheque

issued by a bank but drawn on an account with another bank isa teller's cheque.

In addition to issuing cashier's and teller's cheques, banks often

sell traveller's cheques .

Cashier's cheques and banker's drafts are chequesissued

against the fund

sof a f

inanc

ialinstitut

ion rather than anindividual account holder, decreasing the likelihood the cheque

will bounce.

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Contents of Module A

Exchange rates

Risk management and basics of

derivatives

Documentary letters of credit

Facilities for exporters and importers

Correspondent banking and NRIaccounts

RBI and exchange control in India, EXIM

Bank, ECGC

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Exchange rates

International transaction in cash requires two

distinct purchases

P

urchase of fore

ign currency

Purchase of good/service with the FC

Term foreign exchange is used to denote

foreign currency

Foreign exchange market exists to cater to thedemand for foreign currency/currencies

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Foreign Exchange Market

Organisational setting within which

individuals, governments and banks buy

and sell foreign currencies Only a small fraction of daily transactions

in foreign exchange involve trading of

currency Most foreign exchange transactions

involve transfer of bank deposits

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Definition of foreign exchange

Deposits, credits and balances payable in

foreign currency

Drafts, travellers cheques, letter of credit or billof exchange expressed or drawn in Indian

currency but payable in foreign currency

Drafts, travellers cheques, L/Cs, etc. drawn by

banks, institutions or persons outside India butpayable in Indian currency

The above definition is as per FEMA (1999)

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Exchange rate (1)

Denotes the price or the ratio or thevalue at which one currency is

exchanged for another Exchange rate isvery dynamic

The foreign exchange market is round-the-clock market due to different time

zones Major participants- central banks,

commercial banks, forex brokers,corporations, individuals

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Foreign exchange transactions

(1)

Arbitrage: Is an operation by which one

can make risk free profit by undertaking

offsetting transactions. Can be in interest rates: borrow in one centre

and lend in another

Can be in exchange rates: Buy a currency inone market and sell in another

Arbitrage keeps exchange rates uniform

in all markets

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Foreign Exchange Transactions

(2) Merchant rates: Quotes offered to merchants

(importers, exporters) by banks.

Inter-bank rates: The rates quoted by banks for

dealing in the inter-bank market. Merchant quotations: In India all merchant

quotations for foreign currenciesshall be in somany rupees for one unit of foreign currencyexcept for Japanese Yen, Italian Lira andBelgian Franc (Rs/100 units of the currency)

All quotes are in four decimal places with thelast two digitsin the multiple of 25

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Letter of credit (LC)

A standard, commercial letter of credit (LC) is a

document issued mostly by a financial institution

used primarily in trade finance, which usually

provides an irrevocable payment undertaking.

The letter of credit can also be source of payment for

a transaction, meaning that redeeming the letter of

credit will pay an exporter. Letters of credit are used

primarily in international trade transactions ofsignificant value, for deals between a supplierin one

country and a customerin another.

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Letter of credit (LC) In such cases the International Chamber of Commerce Uniform

Customs and Practice forDocumentary Credits applies.The parties to

a letter of credit are usually a beneficiary who is to receive the money,

the issuing bank of whom the applicant is a client, and the advising

bank of whom the beneficiary is a client. Almost all letters of credit areirrevocable, i.e., cannot be amended or canceled without prior

agreement of the beneficiary, the issuing bank and the confirming

bank, if any. Typically, the documents a beneficiary has to present in

order to receive payment include a commercial invoice, bill of lading

and documents proving the shipment wasinsured against loss or

damage in transit. However, the list might contain requirements topresent documentsissued by a neutral third party evidencing the

quality of the goodsshipped, or their place of origin or place.

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Management of Assets &

Liabilities in commercial bank

Banks face several riskssuch as the

liquidity risk, interest rate risk, credit risk

and operational risk. Asset Liabilitymanagement (ALM) is a strategic

management tool to manage interest

rate risk and liquidity risk faced by

banks, other financial services

companies and corporations.

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Banks manage the risks of Asset liability mismatch

by matching the assets and liabilities according to

the maturity pattern or the matching the duration, by

hedging and by securitization.

Modern risk management now takes place from an

integrated approach to enterprise risk management

that reflects the fact that interest rate risk, credit risk,

market risk, and liquidity risk are all interrelated.Increasing integrated risk management is done

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Risk Planning &

Management Risk Planning & Management is the

identification, assessment, and prioritization

of risks followed by coordinated andeconomical application of resources to

minimize, monitor and control the probability

and/orimpact of unfortunate events.

Risks can come from uncertainty in financialmarkets, project failures, legal liabilities,

credit risk, accidents, natural causes and

disasters as well as deliberate attacks from

an adversary

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Risk Planning & Management Risk planning and management methodologies

consist of the following elements, performed, more or

less, in the following order.

1. identify, characterize, and assess threats

2. assess the vulnerability of critical assets to

specific threats

3. determine the risk (i.e. the expected

consequences ofspecific types of attacks on

specific assets)

4. identify ways to reduce those risks

5. prioritize risk reduction measures based on a

strategy

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Development Banking Vs

commercial Banking.

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Role ofDevelopment Banks in

Economic Development Specialised development financial institutions (DFIs)

such as the IDBI, NABARD, NHB and SIDBI, etc.,

with majority ownership of the Reserve Bank were

set up to meet the long-term financing requirementsofindustry and agriculture. To facilitate the growth

concessional finance to these institutions was also

put in place by the Reserve Bank.

IFCI First development bank In India incorporatedimmediately afterindependence in 1948 under the

Industrial Finance Corporation Act as a statutory

corporation to pioneerinstitutional credit to medium

and large-scale