Corp to Forex

7/31/2019 Corp to Forex

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Corporate Banking


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Corporate BankingWhat are the various critical functions managed by a bank at wholebank level?--lending--product innovation--ALM and treasury functions--Cross selling--foreign exchange business

--risk management--Government business--personnel, HR and training--compliance--technology

--audit and inspection of branches--public relations--international operations


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Corporate Banking

Board of Directors is centrical to the operations of any bank.

In Public Sector Banks, the Board is comprised of nominees of GOI andRBI, representatives from industry, representatives from employeeorganisations and elected members.

The chairman of a PSB is appointed by the GOI.

In respect of private sector banks, while the chairman are elected,the chairman appointment is cleared by RBI.

The Board functions under the overall regulations ofBanking Companies Regulation Act, Indian Companies Act andall other regulations.

All policies and internal regulations are approved by the Board.


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Corporate BankingAs per RBI regulations, for certain important functions, the Board hasto constitute various committees with membership from the

Board members.

The following are the important committees:

1. ALCO (Asset Liability Management)

2. Credit Committee3. Audit Committee4. Risk Management Committee

What is the advantage of committee approach? Why RBI is suggestingthis approach for certain functions of the bank?

In a committee approach, any major decision will have the benefit ofbeing analysed by various members of the committee and the use oftheir expertise.

What are the various important departments at HO and their functions?


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Corporate BankingNormally in any bank the (SBI) chairman will be the CEO of the bank.In some banks the (ICICI) MD may the CEO.

The chairman or MD will be the executive of the bank and othermembers of the Board will be non executive members.

While the policy decisions and periodical high level credit decisionsare taken at Board level, their implementation is done by various

departments at HO.


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Corporate BankingCredit DepartmentInternational BankingTreasuryProducts Development

Various segments of business--Retail Banking--SME

--Corporate Banking--Agri and Rural Banking

Compliance DepartmentAudit and Inspection Department

Human Resources DepartmentIT Department


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Asset Liability Management


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What we shall discuss in this chapter?

1. Composition of a banks balance sheet

2. What is asset liability management?

3. Its significance

4. Its purpose and objective5. ALM as coordinated balance sheet management


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XYZ bank has the following liability and loan portfolio:Rs in

croresSavings Bank Deposits 12500Special term deposits 28000 (average maturity 3 years)

Recurring deposits 2000Demand loan 16000Overdraft 1000Cash Credit 20,000Term deposits 10,000 (average maturity 2 years)Current accounts 8,000

Term loan 7,000 (average repayment 4 years)Classify them as per the liability and loan portfolio and as demand

and time liability.Also bring out the risk if any, faced by the bank.


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Is there a difference between the balance sheet of a bank and thatof others?

Banks balance sheet is also like that of any other company doingbusiness. It is a statement of sources and uses of funds.

Liabilities and net worth form the sources and assets representuse of funds. Funds are used to generate income for the bank.

Balance Sheet reflects the position of assets and liabilities as on aparticular date, normally as on 31st March.


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Before we discuss ALM, let us see the components of balance sheetof a bank

Liabilities AssetsCapital Cash and balances with

RBIReserves and surplus Balances with other

banksDeposits Money at call and short

noticeBorrowings AdvancesOther liabilities and provisions Fixed assets

Other assets

Let us briefly discuss the components


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Before we discuss ALM, let us see the components of balance sheet of a

bank

Liabilities Assets

Capital Cash and balances with RBI

Reserves and surplus Balances with other banksDeposits Money at call and short notice

Borrowings Advances

Other liabilities and provisions Fixed assets

Other assets

Let us briefly discuss the components


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Capital

Considered as banks stake in the business. Should be as per RBIrequirement.

Reserves and surplusIncludes statutory reserves, capital reserves, share premium, revenue and

other reserves and balance in profit and loss accountDeposits

Both demand and time deposits from the publicBorrowingsBorrowings/ refinance obtained from RBI, other banks and other Institutions

as IDBI, EXIM Bank, NABARD etcOther liabilities and provisions Bills payable which includes TT, DD, TC, MT, pay slips, bankers cheques

etc

Inter office adjustments--the credit balance of the net adjustments Interest accrued Others as provision for IT, tax deducted at source, interest tax, provisions

etc.


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Components of assetsCash and balance with RBIThis is the most liquid asset for the bank. This is grouped under three

heads: Cash in hand sum total of cash and foreign currency kept at all the

branches Balances with RBI balances held with RBI including CRR Balances with other banks and money at call and short noticeThis includes balances in current or term deposits with other banks

andmoney lent in the inter bank call money market and repayable within

15 days notice.InvestmentsA major item in assets side, includes investment made in Government

securities, shares, debentures, subsidiaries, and JVs.


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Components of assets

Advances

Cash credits, overdrafts and demand loans

Term loans

Bills purchased and discounted

These are again classified as under, based on securities:

Secured by tangible securities

Covered by bank/ Government securities

Unsecured advancesFixed assets

All immovable properties and vehicles etc are classified here.Generally this will be a smaller portion of the assets of banks.


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Components of assets

Inter office adjustmentsthe net debit positionInterest accrued

Tax paid in advance

Stationery and stamps

Non-banking assets acquired in satisfaction of claims

Others

Includes clearing claims, unadjusted debit balances representing additionsto assets and deduction from liabilities and advances provided to theemployees of the bank

Contingent liabiliites LCs, Guarantees, acceptances on behalf of customers,

Claims against the bank not accepted as liabilities

Liability for partly paid up investments, outstanding forward exchangecontracts, arrears of cumulative dividends, bills rediscounted,underwriting commitments, estimated amount of contracts remaining tobe executed under capital account and not provided for


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Profit and Loss Account Profit and loss account consists of income earned by the bank,

expenses made and the net result. It is prepared for a particular period of time. Normal time period for preparation of profit and loss account is

one financial year namely April to March. Income of banks is divided in to two, namely interest income and

non interest incomeInterest income will include the following: --interest recovered on all types of advances --discount charges on bills purchased and discounted, both

domestic bills and foreign currency bills --dividend and interest income on investments --interest on funds kept with RBI and other banks --interest from all other sources


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Banks Profit and Loss Accounts

OTHER INCOME

Commission, exchange, brokerage

Profit on sale of investments

Profit on revaluation of investments

Profit on sale of fixed assets

Profit on foreign exchange transactions

Income earned by way of dividends from subsidiaries, JVs etc

Miscellaneous income


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Banks Profit and Loss AccountExpensesBroadly classified as Interest expense Other operating expense

Provisions and contingenciesInterest expensesInterest on depositsInterest on RBI/ inter bank borrowingsOther interest

Operating expensesProvisions and contingencies


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How do we define asset liability management?--strategic balance sheet management--the act of planning, acquiring directing the flow of funds through

the organisation--the management of NIM to ensure that its level and riskiness are

compatible with risk/return objectives of the bank--an integrated approach to bank financial management--coordinated management to allow alternative interest rate,

liquidity and prepayment summaries

It allows the banks to test inter relationship between a wide variety

of risk factors including market risks, liquidity risk,management decisions, uncertain product cycles etc

What is its significance?


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The significance of ALM arises due to the following:

1. Volatility

2. Product innovation

3. Regulatory environment

4. Management recognition


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Volatility

Deregulation of financial system has led to a change in thedynamics of financial markets.

This has reflected in

interest rate structures

money supply

over all credit position of the market

exchange rates and

price levels.

For a bank which is trading in money, fluctuations taking place inthe above lead to have direct effect on net interest income (NII).


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Product innovationThere have been rapid changes taking place in the financial products

offered by banks. Sometimes the products are totally new andsometimes the same products have been repositioned withdifferent features.

In any case they have an impact of creating risk on the bank. For

example a fixed deposit with flexible options of withdrawing anytime will put a strain of managing liquidity.

Regulatory environmentGlobally the Bank for International settlements and the Central Banks

of various countries including RBI have been emphasizing onsound ALM for managing market risk

Management recognitionManagements of banks have understood that the game plan of

banking globally has changed and banks must be in readiness tomanage new risks facing the industry.


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What are the purpose and objectives of ALM?

To manage the

--volume

--mix

--rate sensitivity--quality

--liquidity

of assets and liabilities as a whole so as to attain a pre determinedacceptable risk/reward ratio

The important parameters chosen for ALM are

NII, NIM and Economic Equity Ratio

How do we define the above?


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Net interest income= interest incomeinterest expenses.

Volatility in interest rates will have a direct impact on NII immediately.Banks will be focusing on retaining NII and improve the same byincreasing the spread or by decreasing the interest expense.

Net interest marginis a percentage of NII to average total assets. It isactually a spread on the earning assets.

The larger the risk taken on assets, larger will be the interest income,and larger will be the spread.

NIM is arrived by dividing net interest income by average total assets.

Economic equity ratiorefers to the relationship betweenshareholders funds to total assets.

It otherwise compares the relationship between owners funds to total

funds, which is an indicator of long term solvency.


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Objectives of ALM

Can be divided in to macro level and micro level

Macro level

--formulation of important business policies

--allocation of capital--designing products with appropriate price strategies

Micro level

--price matching, which aims at maintaining or improving thespread by ensuring that funds are deployed at a higher ratethan the cost incurred for sourcing them.

--liquidityTreasury performs this task by grouping the assetsand liabilities maturity wise to find out the gap betweenmaturities and to effectively manage the gaps.


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What are the stages of ALM?It is divided in to two functional stages:

Specific Balance Sheet ManagementAsset sideReserve position

Liquidity

Investment/ Security

Loan management

Fixed assets

Liabilities sideShort term liability

Reserve position

Long term liability ( notes and debentures)Capital

The other is interest expense functionWhat should be the policy of a bank to achieve good ALM?


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The ALM policies of a bank will aim at the following:--spread

--Loan quality

--fee income and service charges

--control of non-interest operating expenses

--Tax management

--capital adequacy

What are the risks focused under ALM?1. Liquidity risk

2. Interest rate risk

3. Exchange risk


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What is liquidity?Generally liquidity refers to the ability of a business concern to

meet its maturing short term commitments from out of shortterm assets.

From banks point of view, liquidity need refers to the need

to repay the deposits when withdrawn and

to raise funds for disbursement of loans.


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What is liquidity for a bank? And what is its price?Liquidity is the ability of a bank to accommodate decrease in

liabilities and fund the increase in assets.

It has a price. What it is?

The price of liquidity is a function of market conditions and marketperception of the risks, both interest rate and credit risks.

The liquidity risk can stem both from internal and external factors.

How?

Internal is institution specific based upon the market perception ofthe institution.

External can be geographic, systemic or instrument specific

What are the various types of liquidity risks?


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What are the various types of liquidity risks?

1. Funding risk

2. Time risk

3. Call risk

How is it managed?

Developing a structure for measuring liquidity risk

Setting tolerance level

Measuring and managing risk


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Funding riskrelates to the need to provide funds for netoutflows due to unanticipated withdrawal or non renewal ofdeposits.

The net funds outflow may also arise due to

--frauds leading to loss

--systemic risk --loss of confidence by the Public

--liabilities in foreign currencies

Time riskrelates to the need to compensate for non-receipt ofexpected cash inflow, and also the possible time delay in

raising the fundsCall riskarises out of crystalisation of contingent liabilities


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Setting tolerance level and limit for liquidity risk

Points to be considered

Cumulative cash flow mismatches

Liquid assets as a percentage of short term liabilities

Loan to deposit ratio

Loan to capital ratioRelationship between anticipated funding needs and available sources formeeting those needs

Quantification of primary sources for meeting funding needs

Flexible limits on the percentage reliance on a particular liability categoryDependence on a particular source or a market segment for funds

Flexible limits on the minimum/ maximum average maturity of differentcategories of liabilities

Minimum liquidity position


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Measuring and managing liquidity risk1. Stock approach2. Flow approachStock approach is based on the level of assets and liabilities as

well as off balance sheet exposures on a particular date. The

ratios seen are:1. Core deposit to total assets2. Net loans to total deposits3. Time deposits to total deposits4. Volatile liabilities to total assets5. Short term liabilities to liquid assets

6. Liquid assets to total assets7. Short term liabilities to total assets8. Prime asset to total assets9. Market liabilities to total assets


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Flow approachIt involves the following three major areas:1. Measuring and managing net funding requirements2. Managing market access3. Contingency planning

Net funding requirements are determined by analysing the futurecash flows based on assumptions on behaviour of assets,liabilities and off balance sheet items and also calculating netexcess over various time frames, for liquidity assessment.

It is done under the following four heads

Constructing maturity ladderSimulating alternate scenariosMeasuring liquidity over the chosen time frameMaking assumptions for determining cash flowsMaking market access and drawing contingency plan are the next

step in ALM.


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Banks maturity table under a time bucket of 1 to 14 days is as under:

Cash inflows Rs in crores) Cash outflows Rs incrores

Maturing loans 85 Maturing deposits 98 Interest receivable 15 Interest payable 22 Asset sales 20 Investments 17 Draw down on credit lines 15 Lending commitment 46 Total 135 183

Find out the risk involved.What do you suggest for risk management to the Bank?


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As per RBI guidelines, the assets and liabilities are to be classifiedunder ten time buckets as below:

To-morrow 2-7 days 8-14 days 15-28 days 29 days and up to 3 months Above 3 months and up to 6 months Above 6 months and up to 1 year Above 1 year and up to 3 years Above 3 years and up to 5 years

Above 5 yearsThe negative mismatch should not exceed 5%, 10%, 15%, 20% of the

cumulative cash outflows in the respective time buckets of nextday, 2-7 days,8-14 days and 15-28 days.


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Treasury Management


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Treasury Management in Banks before globalisation

Treasury was earlier considered only as a service centre.

Main functions of Treasury earlier were:---- funds management-- keeping adequate cash balance for daily requirements-- deployment of surplus funds

-- sourcing of funds to meet occasional deficits-- responsibility for meeting CRR and SLR-- transfer pricing==


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Globalisation and its effects on treasury management

What is globalisation?

-- it is the process of integration of domestic market withglobal markets, which results in

-- free capital flow and-- minimum regulatory intervention

What were effects on treasury management?Financial sector reforms,-- deregulation of interest rates-- partial convertibility of rupee and-- floating rate regime for the domestic currency

What were the opportunities of this reform?-- arbitrauge opportunity-- access to various markets=

Treasury Management post globalisation


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Treasury Management post globalisation

From service centre to profit centreFrom stand alone, to integrated approach

Treasury now interfaces between the bank and various marketsThe functions of an integrated treasury are:---- meeting requirement of resources-- efficient merchant services-- global cash management-- optimising profit by accessing various markets-- risk management-- assisting bank management in ALM

What are the other aiding factors?


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Treasury Management post globalisationWhat are the other aiding factors?

-- new Institutional structures like CCIL, FIMMDA, NSDL-- new technology platforms for faster transmission of funds and

communication of message as INFINET, SFMS, ECS, EFT, RTGS-- liberalisations under FEMA-- Foreign Trade Policy-- Opening up of derivative market=

Organisational set of Treasury in Banks


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Organisational set of Treasury in Banks

Some banks have Treasury as specialised branch.Some have the same as a separate Department at Head Office.

It will normally be headed by a top management functionary

Treasury is mainly divided in to three main functions:Front office ( Dealing Room)Mid Office

Back Office

Dealing Room Chief Dealer separate dealers for forex, money marketSecurities market.Securities market dealing primary and secondary.

Dealers will be trading only in secondary market.Primary market participation will be done by Investment Department.Each bank will have an Investment Committee which will takeinvestment decisions and authorise Treasury accordingly=

Treasury activities and Products


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An integrated treasury operates in the following markets:

Money marketSecurities marketForex marketDerivative market

Let us see briefly about treasury participation in each market


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Treasury activities and ProductsMoney Market

RBI defines money market as-- a market for short term assets that are close

substitutes of money.

Features

-- liquid-- can be turned over quickly at low cost-- provides an avenue for equalizingthe short term funds

between lenders and borrowers

What is a call money market?



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yMoney MarketCall Money Market

It is an inter-bank marketMajor players are commercial banksIt is a market where bankslend and borrow for very short periods

Call money-- funds traded over night

Notice money funds traded 2 to 14 daysTerm money funds traded beyond 14 days

T i i i d P d


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Treasury activities and ProductsMoney MarketCall Money Market

It is fully regulated by RBIwhy?

What are the major areas of regulation?

Volume of tradingRate of interestReporting==

T ti iti d P d t


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Treasury activities and ProductsMoney MarketCall Money MarketBanksFor borrowingOn a fortnightly basis, outstanding not to exceed100% of capital funds.They can borrow up to 125% of capital fundson any day during the fortnight

For lendingOn a fortnightly basis, outstanding should not exceed 25%of the capital funds.Can lend up to 50% of capital funds on any day duringthe fortnight.

What are money market instruments?



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Money Market Instruments

Call/ notice/ term moneyCommercial PaperCertificate of DepositTreasury Bills

RepoBill RediscountingInter Corporate Deposits



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Commercial Paper

An instrument regulated by RBI.An unsecured instrument issued as Promissory Note.Can be issued by corporates, AIFIs, PDs.Short term instrument for periods from 7 days to 1 year.

Certificates of Deposit (CD)a debt instrument as CP.only Banks can issue against deposit.while a normal deposit is not transferable, CD is negotiable.interest rate is slightly more than the normal deposit rate.

maturity period7 days to one year.minimum amount of deposit Rs1.00 lac.=



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Securities marketGovernment Securities-- regulated under Government Securities Act 2006

-- issued by both Central and State Governements-- On behalf of the Government, RBI is issuing the securities-- tenor- above 1 year, up to 30 years-- State Government securities normally for 10 years-- minimum Rs10,000/- and multiples of Rs10,000/--- sold under auction

Bonds and DebenturesBoth are debt instrumentBoth are long term securities.Internationally, debenture is considered as an unsecureddebt and a bond is considered as secured.

In India both may be issued as secured or unsecured.While Government generally issues bonds for raising debts,corporates issue both debentures and bonds.



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Treasury activities and ProductsMoney MarketTreasury Bills-- issued by GOI only-- for short term liquidity, hence a short term investment opportunity.-- period- 91 ,182 and 364 days-- minimum Rs25000 and multiples there of-- discount to face value-- sold in auction by RBI

-- auction conducted every Wednesday for 91 days bill andevery alternate Wednesdays for the other two maturities.

-- auctions held through NDS-- competitive bids can be done through NDS-- non competitive bids can be routed through

respective custodians or any Bank or PD which is member of NDS-- open for investment also by corporates, HNIs and NRIs=



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Treasury activities and ProductsForex market products

Spot trades

Forward tradeSwapForeign exchange surplusesInter-bank loans-normally over nightShort-term investments

Nostro accountsShort term loans for exporters, loans against foreign currency depositsRediscounting of foreign currency bills=



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Treasury activities and ProductsDerivative market

Widely used products by treasuries.

It is used for--Managing risk and for ALM--Catering to corporates--Trading purpose

A derivative product is a financial contract,whose value is derived from the spot price ofan underlying contract.

It can be in money market, forex market, share market orcommodities market==

T i i i d P d


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Treasury activities and ProductsDerivative marketVarious Products

ForwardsOptionsSwapsFuturesForward rate Agreements (FRA)==

Risk Management


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Risk Management

Various risks faced by treasury are:

Counter party riskExchange riskGap riskSettlement risk

Country riskLegal riskPrice riskLiquidity risk

Interest rate riskTreasury also sells risk management products to customersHow risks are managed?

Risk Management


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Risk Management

Organisational control

Exposure ceilingLimits on trading positions, cut loss limitsAsset Liability Management

I t t ti it


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Investment activity

As we saw earlier, next to loans and advances, the major portionof funds are deployed in investments.

Basic objectives of investment are:--safety of capital--liquidity--yield

--diversification of credit risk--managing interest rate risk

The entire investment activity should conform to RBI guidelines=

Investment activity


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Investment activityCertain important guidelines of RBI--all investments should be approved by Investment committee-- the bank must have investment policy approved by the Board-- there should be well laid system for monitoring and control-- the three divisions namely front office, mid office and back office

well laid out segregation of duties-- investments to be classified under

HTM held to maturity

HFT held for tradingAFS available for sale

-- HTM securities can be held up to 25% of total investments-- banks are free to decide on the quantum of HFT and AFS categories-- HFT investment to be sold within 90 days

-- shifting of securities from/to HTM can be done once in a yearwith the approval of the Board=

Investment activity


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Investment activityCertain important guidelines of RBI

Shifting from AFS to HFT can be done with the approval of the BoardShifting from HFT to AFS is generally not allowed.In exceptional case it can be done with the approval of the Board/ALCO/ investment committeeInvestment Fluctuation Reserve to be built up to 5%of the investment portfolio==

Foreign Exchange General


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Foreign Exchange GeneralWhat is foreign exchange? How does it arise?

Foreign exchange can be defined asTransactions that involve exchange of one currency with anotherForeign currency itselfInstruments that represent foreign currency.

Foreign exchange transactions arise on account ofTradeInvestment and disinvestmentLending, borrowing and repaymentSavings

Travel

Based on the above. What are the two important aspects offoreign exchange transactions?



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Two important aspects of foreign exchange transactions are:

1. Flow of tradeimport and export of goods and services2. Flow of foreign currency, both inward and outward.

In India, both exports and imports (called as foreign trade) and

flow of foreign currencies are regulated by the Government of India.

Foreign trade is regulated through Foreign Trade Policy and flow of

foreign currency through Foreign Exchange Management Act (FEMA)

We shall discuss both briefly.



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Foreign Trade Policy

It is framed by Ministry of Commerce.

It is implemented through Director General of Foreign Trade (DGFT).

Earlier it was known as Exim Policy

Renamed as Foreign Trade policy in the year 2004.

It is a five year policy.

Current policy period is 2009-2014

Though it is five year policy, every year it is reviewed and changes

announced to suit the current developments.



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The objectives of the Foreign Trade Policy 2004-09 were:

1. to double Indias percentage share of global merchandise withinfive years from the commencement of the policy period and

2. to act as an effective instrument of economic growth by giving athrust to employment



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The other aspect of foreign exchange is flow of foreign currency.This is regulated by Government of India, Ministry of Finance.

It is regulated through an Act of Parliament called as FEMA.(Foreign Exchange Management Act).

Earlier this regulation was made under an Act called as FERA.(Foreign Exchange Regulation Act)

FERA was considered as a stringent Act introduced during a time whenstrict control on movement of foreign currency was necessary.

With globalisation and liberalisation of various policies, such a strict Actwas no longer considered necessary and therefore FEMA was enacted in

the year 1999 and the regulations under FEMA came in to effect from1.6.2000.

Regulations under FEMA are made by RBI.RBI makes necessary changes under FEMA whenever necessaryin consultation with the Government of India and announces the samethrough AP (DIR) Circulars.

Foreign Exchange GeneralRBI l ll f i h i d FEMA


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RBI regulates all foreign exchange transactions under FEMA.Foreign exchange transactions are made available to the Residentsby Banks/ Companies authorised to do so by RBI.

RBI is authorising Banks/ companies under the following categories:

AD I category (Authorised Dealers)Banks and certain other financial institutions who can make availableall types of foreign exchange transactions.

AD II categoryFull fledged money changers who satisfy certain conditions stipulatedby RBI can make available certain transactions, in addition to themoney changing activity.

Full fledged money changersCompanies who are authorised to buy and sell foreign exchangefrom/to the publicThere was another category called as restricted money changers whowere authorised by RBI. They can buy foreign exchange from thePublic, BUT CAN NOT SELL. Now RBI does not authorise them,but permitted AD Banks to authorise them as franchisees



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For the purpose of making available foreign exchange transactions,RBI is categorising the branches of Banks as A, B and C and defines

the types of transactions that they can make available.

RBI will issue certain number of licenses to a Bank.

The respective Bank will decide the branches to whom the license

is to be allotted and advise RBI. RBI will then issue a code number tothe concerned branches, called as AD code. Then such branches canmake available the foreign exchange transactions as per the license.



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Foreign Exchange GeneralA category branches are authorized to maintain Foreign Currencyaccounts including ACU accounts (Nostro accounts).They handle all types of forex Transactions.

B category branches are authorized to handle all types offoreign exchange transactions. They are authorized to operate onBanks' Foreign Currency accounts (Nostro accounts).They can not open Nostro account in their name.

Ccategory branches are authorized to handle trade related andservice related transactions denominated in foreign currencies andIndian rupees through another designated Office, B category branchwhich is called as Link Office (LO). LO in turn would report the

transactions to RBI and Foreign Department .

What is a Nostro account and a Vostro account?



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What is a Nostro account and a Vostro account?

Foreign exchange transactions involve buying one currency foranother.

The buying Bank and selling Bank may be in the same country or indifferent countries. For making payment or receiving payment of a

foreign currency, a bank must maintain a bank account with abank in the foreign country in the respective currency.This account is called as Nostro account (our account with you).

When a foreign Bank is maintaining an account with a domestic Bank

in the domestic currency for the above purpose, such account iscalled as Vostro Account (your account with us).

What are the various types of foreign exchange transactionsdone at branch level?



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What are the various types of foreign exchange

transactions done at branch level?

-- exports-- imports

-- remittances(inward and outward)

-- letters of credit and guarantees-- forward contracts-- issue and purchase of foreign currency, FCTC,-- NRI accounts-- collection and purchase of foreign currency cheques

How the transactions are put through in a branch?



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Foreign Exchange GeneralHow the transactions are put through in a branch?

All foreign exchange transactions ultimately involve either a purchaseor sale of foreign currency in return for the domestic currency.

Whether a transaction is a purchase or sale is decided from thepoint of view of Bank only.

In a purchase transaction, Bank buys foreign currency from thecustomer and in a sale transaction, Bank sells foreign currency inreturn for the domestic currency.

The price (rate) at which the foreign currency is bought or sold

is called as exchange rate and the system of calculating theexchange rate is called as exchange rate mechanism.

We shall discuss some details about exchange rates.

Foreign Exchange GeneralE h R t


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Exchange RatesAll transactions are reported to Head Office by branches.

Why?All foreign exchange bought by the branches have to be sold in themarket and for all the foreign exchange sold by the branches,it has to be bought from the market.

This process of buying and selling in the forex market on account of

the transactions done by the branches is called as cover operation.This is done to ensure that bank is not put to any loss on account ofadverse movement of exchange rates.

Bank will buy foreign exchange at a lower price from the customers

and sell at a higher price in the market. What ever Bank buys from themarket will be sold to customers at a higher price. This process ofbuying at lower price and selling at higher price is called asBuy low and sell high.

This is a general market principle


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Foreign Exchange GeneralExchange RatesIf the domestic currency is kept constant and the foreign currency madevariable, it is called as indirect quote. In India, we follow direct quote.

The exchange rated quoted by branches to customers is called asmerchant rate

Two way quote is not made to customers because,1. A customer does not come to a branch for trading, he comes with a

definite intention of either to buy or sell foreign exchange in aparticular transaction.

2. Our exchange control regulations make it obligatory for Banks toascertain the details of the transactions before they offer anyexchange rate.

There are two different rates for customers:1. Card rate: fixed by Treasury every day morning which will be valid for

the whole day irrespective of any market movements. This is generallfor low value transactions

2. On line rate: the rate quoted by Treasury based on the current marketmovement. This will naturally vary from time to time.



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Foreign Exchange GeneralExchange Rates

At branches we quote different rates for different transactions.

The reasons for quoting different rates are:1. Availability of cover funds2. Locking in Banks funds

3. Inventory carrying cost4. Risks involved in the transactions5. Additional work load carried by the Bank in the transaction



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Foreign Exchange GeneralExchange RatesSettlement at whole bank level

In the inter bank market, let us assume that bank A buys $ 1millionfrombank B to the at Rs48.39, what happens next?

The transaction has to be settled. A has to deliver 1mxRs48.39 to theRupee account of bank B and bank B has to deliver $1 m to the$ account (nostro) of bank A.

This type of exchanging the value of the currencies traded is called asSettlement. There are four types of settlements.

1. SPOT= settlement within two working days after transaction date.

2. CASH= on the same day of transaction3. TOM= on the next working day after transaction date4. Forward= on any day after the spot day.



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g gReporting of forex transactionsPurpose of submission of R returns to RBI1. RBI compiles BOT (Balance of Trade) and BOP (Balance of Payment)

statistics for the country from the R returns.2. RBI is able to monitor the movement of various foreign currencies

in to and out of the country both volume and purpose.

Now RBI is gradually switching over to the system as under:

Instead of each branch submitting the returns directly to RBI,they will submit to their respective Head Office.The HO will submit one consolidated R return for Bank as a whole.RBI expects that the new system will ensure timely submission and

also accuracy of the data.

Let us now define BOT, BOP, Current and Capital accounts



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g gReporting of forex transactions

Balance of Trade: Difference between countrys merchandiseexports and imports during a particular period.

Balance of Payment: Difference between total foreign exchangereceivable and payable by the country during a particular period.

Capital account transactions: Transactions related to investment,disinvestment, borrowing, lending and repayment of borrowing arecalled as capital account transactions.

Current account transactions: Transactions related to trading in goods

and services and purposes other than capital account are called ascurrent account transactions.

Let us now understand certain important institutionsconnected with foreign exchange business.



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Foreign Exchange GeneralInstitutions connected with foreign exchange business

FEDAI (Foreign Exchange Dealers Association of India)

FEDAI is the representative body of the ADs.It is formed at the instance of RBI.

FEDAI provides certain uniform ground rules for the ADs to ensureorderly dispensation of business by all the banks.

The rules are applicable for various types of foreign exchangeTransactions.

In tune with the liberalised policy of RBI, FEDAI also is makingliberalisation in a number of its rules.


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g gInstitutions connected with foreign exchange business

Export-Import Bank of India (EXIM)

-- promoted by GOI-- to finance and promote foreign trade

The functions of Exim bank are:

--lending--guaranteeing--promotional services--advisory services

Lending activities of Exim bank include lending to--Indian companies--foreign Governments/ companies--Indian banks


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Foreign Exchange GeneralR i


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RemittancesInward remittance may come in the form of TT through Swift.SWIFT stands for Society for Worldwide Inter bank Financial

Telecommunication. It is a financial messaging net work withhead quarters at Brussels, Belgium.

It can be DDs issued by banks abroad or in the form of encashment offoreign currency travelers cheques, foreign currency,

collection of cheques denominated in foreign currency.

Inward remittance certificate is issued when we receive a remittancefrom abroad for credit of a customers account.

Encashment certificate is issued when we encash foreign currencyor foreign currency travelers cheques.

They are issued as evidence that the remittance has been receivedor encashment made through an authorized dealer in anapproved manner.



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Remittances

No ceiling has been imposed under FEMA for encashment of foreign

currency or foreign currency travelers cheques for tourists visitingIndia

But if the aggregate amount of foreign currency and foreign currencytravelers cheques exceed the equivalent of $10,000 or if the amount of

foreign currency alone exceeds the equivalent of $5000,they have to declare the same in a form called asCDF (Currency Declaration Form) to the customs at the port of entry.

Customs officials will scrutinize the same and affix their stamp.

It is a valid proof that the currency or travelers cheques have beenbrought in to the country in a genuine manner.

Foreign Exchange GeneralRemittances


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RemittancesIn the case of outward remittance, where do we refer to know the presentguidelines as to the purpose of remittance, ceiling etc?For release of foreign exchange to persons resident in India for variouscurrent account transactions, rules have been given undersection 5 of FEMA1999.Under the rules, the purposes of remittances have been classified underthree schedules I, II and III.Drawal for foreign exchange for the purposes mentioned under schedule I

is expressly prohibited.Drawal of foreign exchange for purposes mentioned under schedule II arepermitted, provided the applicant has secured the approval from theMinistry/ Department of Government of India specified therein.Drawal of foreign exchange up to the limits specified therein in respect of

purposes mentioned in schedule III can be permitted by ADs.Permitting drawal of foreign exchange beyond the limits requires theprior approval of RBI.Every year, as on 1st July, RBI issues Master Circular containing theCodified instructions in this regard. Banks can refer these instructions

in the website of RBI for guidance.



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RemittancesMoney laundering

Money laundering refers to the process of converting illegal moneyin to legal money.

Monetary authorities through out the world areconcerned that illegal money should not circulate through countries

causing damage to countries economy.

Therefore they want each country to have well established system inplace which will ensure that illegal money does not enter in to orexit from the financial system of the country.

To be in tune with global need, India passed thePrevention of Money Laundering Act which sets certain

guidelines for putting through various transactions.

Introduction of KYC guidelines also isa part of such measure only.


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Corporate lending

C t l di


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Corporate lending

Corporates need products from banking system asunder:

a) parking surplus funds

b) cash management

c) managing financial requirements both short term and longterm

d) non fund based requirements

e) merchant banking needs

f) managing foreign exchange business needs

C t l di


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Corporate lending

Corporates are generally coming under:1. SME

2. Mid-corporates

3. Large corporates

C t l di


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Corporate lending

Financial needs of corporates:Working capitalTerm financeNon fund based advance

Methods of financing corporatesFinancing against stocks and receivablesCorporate demand loanMortgage loan

Bill discountingFactoring,Forfaiting

Channel financingFCNRB demand loans and term loans

Export financeBridge loans and take out financing are other two methods of

financing corporates.

C t l di


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Corporate lending

Corporates are extended finance under

a) Single bank borrowing

b) Multiple banking

c) Consortium lending

d) Syndicated lendinge) Take out financing

C t l di


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Corporate lending

Since corporate advances are generally of high value, they areprocessed in a centralised processing cells.

What is a centralised processing cell?

Some banks have the system of Asset Management Teams (AMTs).

What is AMT? what is its role?

Most of the advances will be sanctioned under committee approach.What are its advantages? How does it function?

Every bank has a well documented loan policy and credit policy andprocedures.

They also have delegation of power structure for sanction andreporting of advances.

All advances sanctioned by a particular authority are to be reportedto next higher authority for control purpose.

All corporate advances will be subject to the prudential normssuggested under RBI guidelines

Corporate lending


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Corporate lending

What are prudential guidelines?The prudential guidelines help the bank to take balanced exposure

in advances.Its aim is to ensure that bank does not assume undue exposure to

any one individual, group, or to a particular activity or industrythereby exposing the bank to higher risk.

The prudential guidelines generally relate to:a) Ratio of term loan to total advancesb) Exposure to individual borrowerc) Exposure to group companiesd) Exposure to particular industry

e) Stock market exposuref) Unsecured advancesg) Documentation standardsh) Financing infrastructure projectsi) Bridge loans

Corporate lending


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Corporate lending

The entire credit activity is divided in to two parts, presanction and post sanction.Pre sanction activity consists of:a) Visit to company and holding discussions with company

officialsb) Scrutiny of MOA and AOA in the case of companies, the

respective deeds in respect of othersc) Search in ROC records in case of companiesd) Getting CIBIL reports and referring to RBI caution list and

defaulters liste) Analysis of financial statements and project reports

f) Submission of proposal to the sanctioning authority andobtention of sanction

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Corporate lending

Post sanction activity consists ofa) Conveying sanction of advance along with the terms and

conditions and obtention of Board acceptance in the case ofcompanies and borrowers the case of others. The letterconveying sanction of advance will be acknowledged by theguarantors also.

b) Security documentation

c) Creation of securities

d) Registration of charge with ROC

e) Disbursement

f) Satisfaction of end use of funds

g) Physical inspection as per the stipulated periodicityh) Scrutiny of periodical stock statements and FFR statements

i) Review

j) Renewal

Corporate lending


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Corporate lending

Of the whole activity, making assessment of the financialrequirements, obtention of sanction, making review andrenewal assume major importance.

The assessment of financial requirements will cover the followingareas.

Corporate lending


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Corporate lending

1. Borrower profileName , Address, Manufacturing activity/Locations, Date of

incorporation, Banking arrangement etc ofBrief Background(Company/ Group/ Promoters/ Management

including shareholding pattern )Brief write up on Industry/Sector and Companys standing

RMD Advisory/qualitative approach/Quantitativeapproach/Comments

Indebtedness/Exposure & capital charge

2. Present ProposalProposal : For sanction/approval/confirmation

Credit limits (existing and proposed)Sharing pattern

Corporate lending


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Corporate lending

3. Performance DetailsPerformance and Financial indicators

Movement in TNW

Synopsis of balance sheet

4. Risk assessmentCredit Rating

Risk and mitigating factors

Warning signals/Major irregularities in Inspection Audit/CreditAudit/Other Reports

Security

Changes in Security if any, justification

Corporate lending


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Corporate lending

5. PricingConduct of account

Income analysis

Other Banks/FIs pricing

Proposed pricing6. Loan Policy : Deviations & Compliance:

Whether names of promoters, directors, company, group concernfigure in defaulters/willful defaulters list

Deviation in Loan policy

Deviation in Take over norms and comments

Directors of Borrowers company: status of relation with

Board/ Senior Official of the bank etc


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Corporate lending


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Corporate lending

Important aspects seen while considering a term loana) Cost and means of the projectb) Present status of the projectc) Factors of production and production processd) If plant and machinery are involved, quality of supply

e) If large construction activity is involved, comments on thecredibility of the contractorsf) Whether all regulatory approvals are obtainedg) Technical feasibilityh) Marketingi) Financial viability

--projected profitability--D/E--DSCR--Security Margin--Sensitivity

Corporate lending


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Corporate lending

Assessment of working capitalWhat are the important points seen?

--projected turn over, its comparison to the past actual

--holding of current assetsjustification for holding

--projected level of current liabilities--how much bank can finance and what is the deficit

--if deficit is identified, how the company is going to bridge thegap

Corporate lending


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Corporate lending

Follow up of advances, review and renewalFollow up mainly involves:

a) Obtention and scrutiny of periodical stock and receivablestatements and select operational data

b) Periodic visits to factory and company office

c) Holding discussions with company officialsd) Monitoring the operations of accounts

e) In respect of vary large advances having National significance,observing the developments and quoted in the Press, stockmarket perception, analysts views etc

f) Obtention and scrutiny of FFR I and II forms

g) Follow up of bank exposure under LC and BG issued on behalf ofthe company

Corporate lending


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Corporate lending

All large term loans are subject to half yearly review.The review will cover the following:

a) What is the present stage of completion of the project?

b) Whether the project is being implemented as per plan?

c) If there is a deviation from original plan, whether this has been

properly processed and approvals obtained?d) Whether the time schedule is being adhered to? If there is any

delay, what are the reasons? What is the likely impact?

e) End use of funds

f) Obtetnion of necessary Government clearances

g) Likely date of completion and commencement of commercialproduction

h) Whether periodic interest is being serviced

Corporate lending


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Corporate lending

Renewal of loan limits

Working capital and non fund based advances are generallysanctioned for 12 months only subject to review. Based on thereview bank will reduce or renew at the existing level or enhancethe loan limits.

While renewing the limits, bank will mainly focus on the following:

a) Whether the estimated turnover and profits have been achieved.

b) Whether the financials have been achieved as per projections.

c) Whether the securities as per sanction have been created.

d) Whether the terms and conditions stipulated have been satisfied

e) Whether any diversion of funds have taken place

f) Whether the entire turn over achieved by the company has beenrouted through the account

g) Whether the industry in which the company is engaged isperforming well

h) Wh th ti t h b d b th

Documents

Corp to Forex