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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Chapter 1 - INTRODUCTION
The word ‘bank’ i t der ived from the word ‘bancus’ or ‘banque’ that is French.
There was other of the opinion that the word ‘bank’ is or ig inal ly der ived from the German word ‘back’ meaning jo int for which was I ta l ianized into ‘banco’ . But whatever be the or ig in of the word bank as Prof . Rramchandra Rao says.” I t would t race the history of banking in Europe from middle ages.”
General ly , banks do the business of money they take deposi ts of moneys from cl ient and give loan to the person who has need of money. But in th is age, for the convenience of customer, banks provides some other services to their customer such as bankers cheque, overdraf t , internet banking, ATM faci l i ty , paying of b i l ls , credi t card, te legraphic t ransfer, insurance, demat etc.
For a people, i t is d i f f icul t to keep a very big amount of money in his house safely. So, people save their money to bank. Bank gives loan to the person who has need of money and gets higher interest on i t than the interest of deposi t . The margin between the interest of loan and interest of deposi t is the income of bank.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 1
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Chapter 2 – RESEARCH METHODOLOGY
Research Purpose :Research Purpose :
Comparative Analysis of loans & Advances of Rajkot Nagar ik Sahakar i Bank wi th that of other major compet i tors and f ind out what we are lacking in our products, which area we need to improve and also f ind out the dist inguished services provided by the di f ferent banks in the industry.
We also done another research that is Service Satisfaction Review of Rajkot Nagarik Sahakari Bank’s Customer , The main object ive of the study is to know the sat isfact ion level of the customer f rom bank’s Service.
For accompl ishing the object ive of the study researcher needs pr imary informat ion f rom the respondent and for that exploratory research design is sui table.
Scope of the Study :Scope of the Study :
This Market Research involves the study of –
Comparat ive analysis of Banking products of RNSB with other banks.
Brand preference of RNSB. Service Sat isfact ion Review of RNSB’s Customer
Comparative study of different banking products done at Rajkot Nagarik Sahakari Bank has helped in understanding the products of d i f ferent r ival banks very wel l and also f inds out their market ing strategies which wi l l help us convenience the exist ing customer di f ferent banks wel l and also provide them where we are better than the bank with which they are t ransact ing r ight now. So study wi l l help sale execut ive to convey the r ight services to the r ight customers.
Which features are most prominent for consumers - brand preference is a lso answered by th is Market Research.
Research helps to know the satisfaction level of the RNSB’s customer from Bank’s Services .
Research also involves the inf luence of promot ional and advert is ing act iv i t ies on the consumers’ buying behaviors .
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 2
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Market Research also t r ies to f ind out the ident i f icat ion of acceptance of new brand extension or l ine extension .
Source of Data :Source of Data :There are two sources avai lable for data col lect ion. One is primary source and another one is the secondary source .
a) Pr imary Data Quest ionnaire Observat ion
b) Secondary Data From other Bank Previous Reports Websites
Data source :
Primary Data:
We have conducted a survey for knowing the Service Satisfaction of the Rajkot Nagarik Sahakari Bank .
We have taken the in depth interv iew of the persons and ask quest ioner to know the Satisfaction of the customers about the Rajkot Nagarik Sahakari bank, i ts product and service .
Secondary Data : From Other Banks, Websi tes.
For making comparative research of the Banking product , we have personal ly v is i ted the branches of above l is ted di f ferent banks. We have col lected these data f rom the relat ionship Off icer(RO) of the banks and from the internet to know how Rajkot Nagarik Sahakari bank is d i f ferent f rom al l other bank.
Sampling DesignSampling Design :Sampl ing design is one of the most important aspects where the design must be appropr iate in order to have the desired resul t . Sampl ing design includes var ious aspect and they are as fo l lows:
Sampling Area : Saurashatra
Sample Size : 50
Limitation of the Project :Limitation of the Project : The market survey was l imited to area of Saurashatra .
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 3
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Sample s ize is only 50 , which may not represent the overal l populat ion.
Lacks of advanced scient i f ic techniques for analysis and interpretat ion.
In such cases respondents were not able to give al l informat ion in such cases as much as possible informat ion was taken.
We can’ t meet each and every user because of Human Limitat ions and other problems so we select some sample.
Conclusion is der ived by onesel f (Decis ion Maker) .
Time constraint .
Chapter 3 – INDUSTRY PROFILE
EARLY HISTORY OF BANKING
As ear ly as 2000 B.C. the Babylonians had developed a banking system. There is evidence to show the temples of Babylon were used as banks. After a per iod of t ime, there was a spread of i r re l ig ion, which soon destroyed the publ ic sense
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
of secur i ty in deposi t ing money and valuable in temples. The pr iests were longer act ing as f inancial agents. The Romans did minute regulat ions, as to conduct pr ivate banking and to create conf idence in i t . Loan banks were also common in Rome. From these the poor c i t izens received loans without paying interest , against secur i ty of land for 3 or 4 years.
Dur ing the ear ly per iods, a l though pr ivate indiv idual most ly d id the banking business, many countr ies establ ished publ ic banks ei ther for the purpose of faci l i tat ing commerce or to serve the government.
However, upon the revival of c iv i l izat ion, growing necessi ty forced the issued in the middle of the 12 t h century and banks were establ ished at Venice and Genoa. The Bank of Venice establ ished in 1157 is supposed to be the most ancient bank. Or ig inal ly , i t was not a bank in the modern sense, dur ing s imply an of f ice for the t ransfer of the publ ic debt.
In India, as ear ly as the Vedic Per iod, banking, in most crude from existed. The books of Manu contain references regarding deposi ts, p ledges, pol icy of loans, and rate of interest . True, the banking in those days largely mint money lending and they did not know the compl icated mechanism of modern banking.
This is t rue not only in the case of India but a lso of other countr ies. Al though, the business of banking is as old as authent ic h istory, banking inst i tut ions have s ince than changed in character and content very much. They are developed from a few simple operat ion involv ing the sat isfact ion of a few indiv idual wants to the compl icated mechanism of modern banking, involv ing the sat isfact ion of capi ta l s lowly seeking employment and thus providing the very l i fe b lood of commerce.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
TYPE OF BANKS
Reserve Bank of India (RBI) Nationalized Bank State Bank Group Co-operative Bank Private Bank (old & new) Foreign Bank Regional Rural Banks
RESERVE BANK OF INDIA
The Hi l ton-young commission, appointed in 1926 has recommended the necessi ty of central ly empowered inst i tut ion to have ef fect ive control over currency and f inancial t ransact ion in the county. Accordingly, the Government had then passed Reserve Bank of India Act, 1934 and establ ished the Reserve Bank of India wi th ef fect f rom 1 s t Apr i l 1935. The pr incipal a im behind th is was to organize proper control over the currency management in the interest of country benef i ts and to maintain f inancial stabi l i ty . With th is, the RBI mainly looks af ter the fo l lowing important funct ions:
To keep ef fect ive control over creat ion of credi ts and currency supply To control the Banking transact ions of Central and State Governments. To act as Central administered Author i ty of a l l other Banks in the country. To organize control over Foreign Currency Transact ion. To assist for improvement in f inancial aspect of the country .
NATIONALISED BANKS
The Banking Company Act establ ishes i t in July 1969 by nat ional izat ion of 14 major banks of India. The sent percent ownership of the bank is of government of India.
STATE BANK OF INDIA & GROUP
The State Bank of India was establ ished under the State Bank of India Act, 1955, the subsidiary banks under the State Bank of India (subsidiary Banks) Act 1959. The Reserve Bank of India owns the State Bank of India, to a large extent, and rest of the part is some pr ivate ownership in the share capi ta l of State Bank of India. The State Bank of India owns the subsidiary Banks.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
OLD PRIVATE BANKThese banks are registered under Company Act, 1956. Basic di f ference between co-operat ive banks and pr ivate banks is i ts a im. Co-operat ive banks work for i ts member and pr ivate banks work for earn prof i t .
NEW PRIVATE BANKSThese banks lead the market of Indian banking business in very short per iod. Because of i ts var iety services and approach to handle customer and also because of long working hours and speed of services. This is a lso registered under the Company Act. 1956. Between old and new pr ivate sector bank, there is wide di f ference.
FOREIGN BANKSForeign Bank means mult i -countr ies bank. In case of India Foreign Banks are such Banks. Which open i ts branch of f ice in India and their head of f ice is outs ide of India. For Ex. Ci t i bank,HSBC bank, Standard Chartered.
CO-OPERATIVE BANKS
1. state co-operat ive banks :state co-operat ive bank means the pr incip le co-operat ive society in the state. The pr imary funct ion of i t is to f inance other co-operat ive societ ies in the state.
2. Central /Distr ic t co-operat ive banks :
Central and distr ic t co-operat ive bank means the pr incip le co-operat ive society in a distr ic t . The pr imary object ive of th is banks is to f inance other co-operat ives in the part icular d istr ic t .
REGIONAL RURAL BANKS
Regional rural banks are added in banking s ince October 1975. These banks have been establ ished by the govt. of India in terms of provis ion of the regional rural bank act 1976. The central govt . whi le establ ishing a regional rural bank on the request of a commercial bank, shal l speci fy the local l imi ts wi th in which is shal l operate. The regional rural bank may establ ish i t ’s branches or agencies at any place with in the not i f ied area.State bank of saurashtra sponsors regional rural banks in saurashtra.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
DIFFERENCES BETWEEN COMMERCIAL BANKS ANDCO-OPERATIVE BANKS
(1) This operate through their network of branches spread over mainly in
urban and semi urban areas and their management and pol ic ies are control led by head of f ice.
This have dist inct ent i t ies by themselves wi th separate jur isdict ion and independent broad of d i rectors. Banks are organized on a co-operat ive basis and are governed by their members according to the co-operat ive laws.
(2) Banks are subject to the Banking Regulat ion Act and the control of the
Reserve Bank of India.
Banks are organized on a co-operat ive basis and are governed by their members according to co-operat ive laws and are under the control of state government and to a lesser extent of the Reserve Bank of India certa in provis ion of Banking Regulat ion Act is a lso appl ied.
(3) Banks are audi ted by external audi tors.
Audit and inspect ion of banks is done by the state co-operat ive department and Reserve Bank of India.
(4) Banks are required to maintain minimum rat ios between their balances
with the Reserve Bank of India, other cash an dis investment in approval secur i t ies and demand t ime deposi ts.
Banks maintain cash reserve and l iquid assets in re lat ion to deposi ts only.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 8
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
(5) Deposi ts of banks may be col lected in one area and lent in other areas
and they can be shi f ted f rom one centre to another.
Deposi ts can be used for f inancing agr icul tural and other act iv i t ies only.
(6) Banks can invest more f reely than their co-operat ive counterparts.
Bank has to fo l low the rules for investment la id down by the Registrar of Co-operat ive Society and Reserve Bank of India.
(7) Banks enjoy more discret ion in their lending pol ic ies which are determined
by their board of d i rectors subject of course to the regulat ion on Reserve Bank of India.
Banks have to fo l low the loan pol ic ies la id down by the Reserve Bank of India and Co-operat ive department.
(8) Rate of interest payable are control led by Reserve Bank of India.
Rate of interest payable are more in co-operat ive bank.
(9) Any people can borrow from banks.
Only members of the bank are al lowed to borrow.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 9
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Central Bank and Monetary Authority
Reserve Bank of India
Apex Banking Institutions
Development Banks
Industrial Development Banks State Level Land Development Banks
All India State Level Primary Land Development Bank
IFCI ICICI SFC SIDC
Subsidiary Companies
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 10
IDBI NABARD EXIM BANK IIBI NATIONAL HOUSING BANK
SIDBIBanking Institutions
Commercial Banks Regional Rural Banks Co-operative Banks
Public Sector Private Sector
State Bank Group
Nationalized Banks
Subsidiary Companies
SBI Subsidiary Banks
SubsidiaryCompanies
Indian Foreign
Old Banks
NewBanks
Local AreaBanks
State CooperativeBanks
Central & DistrictCo-operative Banks
Industrial Development Banks
All India
IFCI ICICI
Subsidiary Companies
State Level
SFC SIDC
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Chapter 4 – COMPANY PORFILE
HISTORY OF RAJKOT NAGRIK SAHAKARI BANK
Rajkot Nagar ik Sahakar i Bank is a leading Co-Operat ive Bank in Gujarat State, India. I t has completed hal f a century of i t existence. 93% of accounts are bel low Rs.200,000 which makes true i ts s logan “THE SMALL MAN’S BIG BANK”.
Bank was establ ished on 5th October 1953 With a smal l Capi ta l Of Rs. 4890 and Membership of 59 persons under the leadership of Late Keshavlal Amrut la l Parekh as a Chairman, and Late Janmashankar Antani as a M.D. Bank has made tremendous & real progress under the leadership of former Chairman Late Shr i Arvindbhai Maniar. Bank was the f i rst co-operat ive inst i tute to star t funct ioning in the erstwhi le state of Saurashtra. Bank was inaugurated by "SAHAKAR MAHARSHI" late Shr i Vainkunthbhai Metha.
The bank has been awarded ‘A’ c lass of audi t by the Government s ince i ts incept ion. The bank has crossed the pr ior i ty sector lending rate and at taches due importance to Nat ional Planning and Nat ional pr ior i ty f ixed by RBI.
The bank has been conferred Scheduled status by RBI f rom 1 s t Sep. 1988 as per the provis ions RBI Act, 1934.
The bank has also earned the status of Mult is tage Co-operat ive Society f rom Central Registrar of Co-operat ives, New Delhi , on 17 t h Jan. 2001 and has also been issued l icenses by RBI to open four branches at Mumbai. Out of which one branch has been opened on 30 t h March 2002
Being in the service sector wi th a v is ion of current & future t rends, Bank star ted automat ion & modernizat ion way back in 1987 and by 1995 al l the Branches were computer ized.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 11
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
REGISTERED & HEAD OFFICE
Nagarik Bhavan No.1,Dhebarbhai Road,Rajkot – 360 001. (Gujarat)Phone : (0281) 2233916-7-8Fax : (0281) 2223933.
Registrat ion No. : 587Registrat ion Date : 21/09/1953.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 12
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Social Contribution
RNSB has endeavored to discharge i ts social obl igat ions by contr ibut ing for the social , academic, cul tural , nat ional , women’s and Defense causes. I t bel ieves to return the earning wherefrom they are der ived. With th is noble ideal in the s ight, the bank has denoted a handsome amount for an Engineer ing Col lege and Archi tectural col lege being run by Vyavasayee Vidya Prat isthan Trust , Rajkot .
1. Donat ion to Educat ional Inst i tut ions and Hospi ta ls.2. Fodder Supply to Catt le Camps.3. Promot ion of Sports Act iv i t ies.4. Loans to Educat ional ly Unemployed Youth. 5. Help to Earthquake Vict ims by Providing Soft Loans.6. Rajkot Nagar ik Sahakar i Bank Prer i t VVP Engg. Col lage Was Sponsored by
BANK .7. Indubhai Parekh School Of Archi tecture was sponsored by BANK. 8. DOLL museum is managed by RNSB in the Rajkot. ( which is 3 r d in the ASIA
and 2 n d in the INDIA ) 9. Bank enter into a histor ic agreement wi th BSNL to provide free of cost
mobi le connect ions to our members, of fer ing them faci l i ty of f ree CUG.
A grate number of social and educat ional inst i tut ions have provide the bank an opportuni ty to assist them in their need of hour and thereby der ive sat isfact ion to just i fy i ts co-operat ive existence.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 13
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
FEATURES
1. Largest shareholders in the year 2006-07 are 218059.
2. Introduced smart card system for shareholders.
3. Transact ion of shares only can be done through shareholders associat ion of RNSB
4. Demat faci l i ty as wel l as stamp wending
5. Net NPA is zero
6. RNSB’s reserve is sound backs NPA.
7. Out of 28 branches 26 has i ts own bui ld ing.
8. For bi l ls d iscount and other remit tance, let ter of credi t , export business bank has t ie up with HDFC, Indus bank & ICICI.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 14
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Organizational Structure:
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 15
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
BANK FRIST DO :
Banks main funct ion is col lect the money from peoples and lend that money to customers. When we ta lk about Indian banking system we see that RBI has made some rules and restr ic t ion for col lect ing and lending money. Banks are always want to made a large f inance because i t ’s seen the working capaci ty of banks so banks are somet ime made a wrong f inance to wrong part ies. So RBI now a day made str ike rules for landing money to customers. So banks are not d i rect ly lending al l money to customers f i rst bank less the CRR (cash reserve rat io) , which are 5% of total deposi ts. Then banks are need 25% to 30% money for SLR. So af ter th is banks are able to lending 65 % to 70 %money form total deposi ts. Af ter th is process al l banks are create a sound l iquidi ty.
CLASSIFCATION OF ADVANCES :
Bank loan take var ious, depending upon the wishes and business customs of the borrower or the requirement of the bank. The loans usual ly found in a bank are ei ther unsecured or secured .
Unsecured loans
A loan which are arranged no speci f ic col lateral and which are the obl igat ion of borrowers who, in the opinion of the lending bank are excel lent credi t r isks. Such advances are evidenced only by a negot iable instrument, promissory note or b i l l and are cal led “unsecured “ or “c lean”.An unsecured loan is granted by the Bank only af ter considerat ion has been given to the credi t s tanding of the appl icat ion and af ter the bank has been sat isf ied that the prospect ive borrower wi l l be able to make repayment of the loan in a reasonable per iod of t ime which I usual ly determined at the t ime loan is sanct ioned. In the case of unsecured at the banker re l ies on the personal goodwi l l of customer. The basis of such advances s the credi t of the borrower and the banks gets nothing tangible to fa l l back upon in case of defaul t by the borrower to repay the loan. The dist inct ion between secured and unsecured advances recognized legal ly for balance sheet purposes has an undesirable ef fect on the publ ic ’s mind as advances which are made against the personal secur i ty of the borrower have to be shown in the balance sheet as unsecured, which term conveys a feel ings of unsoundness in he popular mind and as such these advances are discouraged by bankers, a l though in ef fect they may be in no way, infer ior to what are known as secured advances.
In consider ing appl icat ion for unsecured advances the banker must sat isfy h imsel f that :
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 16
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
1. The purpose for which the loan is required is l ikely to be remunerat ive and the product readi ly saleable.
2. Amount and per iod of loan appl ied for and t ime of appl icat ion are appropr iate to purpose.
3. The appl icant understands his business and co-obl igates i f any, are credi t worthy.
4. He has suff ic ient resources of h is own for the expansion of the business and is not over – t rading.
5. He owns suff ic ient landed and immovable property in the local i ty where he carr ies on business.
6. Appl icant has no speculat ive tendencies and is reported to be a good pay master.
7. Borrower wi l l be able to return the money in short per iod and the loan wi l l be used for genuine trade purposes.
8. Borrower has the legal capaci ty.9. Purpose of the loan is wi th in the terms of governments, current credi t
pol icy as expressed in RBI ’s d irect ives issued to banks from t ime to t ime.
Secured LoansA smal l percentage of the loans of banks consist of unsecured loans to borrowers who because of their strong f inancial condi t ion of potent ia l earning capaci ty have been able to convince the bank of repayment at matur i ty.
There are many customers of a bank, who are not so wel l p laced and whose f inancial responsibi l i ty or income is not strong to just i fy unsecured credi t , amount of credi t the borrowers would l ike to obtain is out of proport ion to his net worth. I t is usual for borrowers to strengthen their credi t obl igat ion by some approved tangible secur i ty to support loan. This the bank may sel l in the event of the borrower fa i l ing to pay his loan at the appointed t ime.
Why loans are secured?
1. The f inancial condi t ion of the appl icant for loan is not strong enough to just i fy an advance without secur i ty.
2. Some customers would borrow on a col lateral basis rather than to just i fy an advance without secur i ty.
3. The borrowers may feel that he has an obl igat ion to honor and he may be forced to repay the loan.
4. Sometimes secur i ty is furnished so that more favorable rate of interest may be obtained by the borrower.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 17
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Appraising the securities
The work secur i ty means anything given to protect or safeguard the repayment of an advance and to just i fy the term.
Then the th ing so given should i tsel f be safe otherwise the object for which i t is g iven is not served.
In general the intr insic value as wel l as the current market value is determined. The secur i ty must possess the fo l lowing character ist ics i f i t is to serve tru ly the purpose of a bankers’ secur i ty.
1. Marketabi l i ty2. Stabi l i ty of p lan.3. Durabi l i ty4. Easy transferabi l i ty .5. Easy determinat ion of value.6. Margin7. Yield
Types of security
1. Direct i .e. deposi ted by the debtor to secure his own account.2. Third party i .e. deposi ted by a th i rd party to secure the customers
‘debt.
Approved Securities
1. Tender stocks and shares.2. Guarantees by responsible part ies.3. Ti t le deeds4. Bi l ls of exchange5. Promissory note.6. Goods of document of t i t le to goods7. Third of second mortgage.8. Undeveloped lands.9. Bi l ls of sale, mortgage and books debts.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
TYPES OF LOAN AND HOW IT COMPUTES WITH OTHERS:
LOANS GIVEN TO CUSTOMERS
Personal surely loan Smal l Traders & Shopkeepers loan Vehic le loan Cash Credi t Land and Bui ld ing loan Industr ies loan Gold loan Loan on NSC,KPV,LIC pol icy and Fixed Deposi ts Mortgage loan (Social reason & Emergency Borrowing) Smal l business and industr ies loan Educat ion loan
LOAN GIVEN TO STAFF MEMBERS
Vehic le loan Housing loan Fest ival loan Surety loan Housing equipment loan Overdraf t system
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 19
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Personal surely loan
Maximum l imit to Non Government employee Rs.5000. Maximum l imit to Government employee Rs.10000. Two guarantors Sources of income and resident proof In case of Govt. employee instal lment should be direct ly deduct f rom
salary. Repayment of loan in 40 equal instal lments. Rate of interest 15%.
Compares to others it’s;
Pros.
1. Easy to people gett ing th is loan in lower rate than other banks
2. No document charge and t ime saving process.
3. No guarantors required but borrower must be shareholder of bank.
Cons.
1. The amount of loan is very lower then other banks l ike Nat ional ize and other pr ivate banks.
2. Not cover large no. of customer in th is loan l ike other banks because of l imi tat ion of th is scheme.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Small Traders and Shopkeepers loan
Smal l shopkeepers who do not maintain books of account and have stock in t rade can get loan.
Maximum l imit up to Rs. 15000 or 50% of the stock which is less. Repayment of loan in 40 equal instal lments. Rate of interest 12% p.a. Loan wi l l be given on type of C.C.(cash credi t ) a lso.
Compare to others it’s
Pros.
1. Most useful for smal l income person who has smal l business and their most prefer th is bank.
2. Compare to other nat ional ize banks and pr ivate banks which are not interested in th is type of f inance. RNSB are most use th is chance.
3. No more document requires and no processing charges so i t cheaper to borrowers.
Corn.
1. The recovery of th is loan is some very tuf f because some t ime borrowers are not interested to repayment of loan.
2. The amount of th is loan is lower and now days most of customers are needed more amount loan so there are going for other pr ivate and nat ional ize banks.
3. Rate of interest is somet ime problems for very smal l business persons who are want to borrow the money.
Vehicle loan
Now a days large number of people are want to buy a vehic le because now vehic les are cheaper the past because of compet i t ion in automobi le sector and banks are t r ied for th is loan most. RNSB has also provided th is loan for customer. Banks has di f ferent schemes for th is loan. These are New vehic le loan, Old vehic le loan, Tie up with PAL automobi le manf. In Rajkot .
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
New vehicle loan (except car loan)
Quotat ion of vehic le. Two guarantors. Sources of income. Addit ional secur i t ies. ( e.g. land.bui ld ing,F.D.) NSC,LIC pol icy . Maximum l imit 75%. Repayment of loan in 40 equal instal lments up to amount of Rs.25000 Repayment of loan in 40 equal instal lments i f amount of loan is more than
Rs.25000 Rate of interest 13%.
Old vehicle loan
Maximum l imit var ies between 25% to 60% according to valuat ion. 25% of margin money has to deposi t in bank. Vehic le loan deposi t Rs.1000 to Rs.10000. Old vehic le loan l imi t Rs.4000 to Rs.40000 Rate of interest 13%.
Tie up with PAL Auto. Manf.
RNSB provides loan to PAL Auto. Manf. Which is manufactured Diesel r ickshaw in Rajkot? And bank gives advances on vehic le wi th lower rate of interest .
Rate of interest is 11%. Repayment of loan in maximum 36 equal instal lments.
Compare to other it’s
Pros.
1. Quick f inance for any type of vehic les so any customers are gett ing f inance for any vehic les.
2. Large numbers of borrowers under th is loan than any other co-operat ive banks.
Cons.
1. Limited customers wi l l be el ig ib le for loan because rule of bank that only shareholders wi l l get a loan.
2. Compet i t ion in vehic le f inance now a days in great and RNSB’s work in th is s ight is not more aggressively most of customers are go for other banks.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 22
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Cash Credit (C.C.)
Cash Credi t is the main method of lending in India and accounts for about 70% of total bank credi t . Under th is system, the banker speci f ies a l imi t , cal led the cash credi t . L imit for the each customer, up to which the customer is permit ted to borrow against the secur i ty of tangible assets or guarantees. The customers wi thdraws from his cash credi t account as and when he needs the funds and deposi ts any amount of money, which he funds surplus wi th him on any day. The cash credi t account is thus an act ive and running account to which deposi ts and withdrawals may be af fected frequent ly. The customer is required to provide tangible assets as secur i ty to cover the amount borrowed from the banker. The borrower is charged interest on the actual amount ut i l ized by borrower and for the per iod actual ly ut i l ized only.
There is no any l imi t for a l lowing Cash Credi t . Against business turnover and stock margin th is faci l i ty is avai lable.
There is no any l imi t . Books of account for last three years. Stock l is t at the date of appl icat ion. Income tax return and assessment order of last three years. Audited report f rom C.A. Municipal shop act l icense. Receipt of rent . Partnership deed. Register of f i rms. S.S.I . incense in case of smal l scale industry. In case of company memorandum of associat ion and art ic le of
associat ion. Project report and C.M.A. report . The rates of interest are 13 % to 15 % and also give rebate i f rat ing of
customers is AAA and AA.
Compare to others it’s,
Pros.1. In the region of Rajkot these faci l i ty wi l l be used by customer highest
form RNSB because at that t ime no one co-operat ive bank has large amount for these faci l i ty , so RNSB is wonderful ly compute wi th nat ional ize banks at that t ime.
2. Customer relat ionship is most important in th is faci l i ty and RNSB has large numbers of customers who are cont inue gat ing th is faci l i ty .
3. The processor of f inance of C.C. is t ime saving on behal f of nat ional ize banks. So customer gett ing C.C. in less t ime.
Cons.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 23
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
1. Many t imes l imi tat ion of ru les of co-operat ive f inance are make di f f icul ty for banks to give f inance and by th is reason Banks lost few customers.
2. Now day’s new customers making is d i f f icul t because of new comer pr ivate banks and nat ional ize banks. So bank has cont inued with older customers.
3. The restr ic t ion on the co-operat ive banks is st ick af ter the some co-operat ive bank’s demotions so i t ’s not possible to RNSB take big r isk on any l imi ted customers.
Land and building loan
Land and bui ld ing loan is g iven for d i f ferent purposes. Now a day the business of land and bui ld ing are in growth so bank wi l l concentrate on th is type of loan.
(A) Purchases
Only for purchases of bui ld ing or home maximum l imit is 80% of register document.Maximum amount of purchasing house or bui ld ing is Rs.10,00,000/-
Regular customers are gat ing rebate of 1% in interest rate. Rate of interest is 14% Repayment of loan in 144 equals instal lments.
(B) Construction
Maximum l imit is 80% of est imated cost of construct ion. Plan from corporat ion. Permission deed star ted f rom or ig inal owner. Loan wi l l be given in di f ferent t ime per iod of construct ion of
bui ld ing. Rate of interest is 14% Repayment of loan in 144 equals instal lments.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 24
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
(C) Repairs
Purpose of repair ing a house or bui ld ing loan amount is maximum 80% of document of bui ld ing.
Maximum amount in Rs.2,00,000/- Rate of interest is 13.5% Repayment of loan in 144 equals instal lments.
Compare to others it’s,
Pros.
1. Most of middle c lass peoples are go for co-operat ive f inance for purchasing a bui ld ing and houses because of cheaper f inance of co-operat ive banking.
2. In the past RNSB is one and only bank who give these type of f inance on cheaper rate of interest to any c lass customers.
3. RNSB’s main funct ion in loan schemes are housing f inance for middle and lower income’s customers so i t ’s today also f i rst choice of the lower and middle c lass.
Cons.
1. Rate of interest is not compute wi th other banks, l ike housing f inance agencies of govt. and other banks.
2. Limitat ion of area of cover ing because vi l lager are not gat ing loan from the banks.
3. Now a days compet i t ion in housing f inance are cut throw so large numbers of f inance companies and pr ivate and nat ional ize banks are in compet i t ion. So RNSB’s customers are going for other easy f inance companies.
Loan for purchasing housing equipment & components
Purpose of th is loan is providing the loan for housing equipment for better l i fe to customers.
Govt.servants / non-govt.servents / or a person who regular ly paid I .T.return.
Loan wi l l be 80% amount of the pr ize of equipment or goods. And maximum amount is Rs.50,000/-
Rate of interest is 13% and t ime per iod of repayment in instal lments is maximum 66 months.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 25
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Compare to others it’s,
Pros.
1. Customers are gat ing loan for any types housing equipment easi ly .
2. Most of urban co-operat ive banks and nat ional ize banks are not g iven th is types of loan so RNSB wi l l do heal thy compet i t ion wi th other banks.
3. Processes of gat ing loan are very easy and repayment faci l i t ies are also very easy for borrowers.
Cons.
1. The amount of loan is lower then other pr ivate banks so many customers are go for other f inance sources.
2. Rate of interest is a lso high then other so i t ’s create problem for heal thy compet i t ion.
3. Banks doesn’ t have any contract for any company for only f inancers.
Industries loan
In th is segment the smal l and middle levels industr ies are el ig ib le for industr ies f inance.
Al l machinery loans are considered as industr ia l loan. For purchasing an of f ice equipments and furni ture are also considered
under th is loan.
For stock and components f inances wi l l g iven 60 % to 75 %. And interest rate is 13 % to 15 %. As per amount of loan.
Rebate wi l l be given to the AAA & AA rat ing customers who are regular pay the instal lment of loan.
For gating this loan bank need,
1. Two guarantors.2. 1 year book of account.3. Shop act l icense.4. S.S.I .NO.5. Addi t ional secur i t ies i .e. land / bui ld ing / F.D.etc
Compare to others it’s,
Pros.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 26
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
1. RNSB is very old bank in th is region so i t has many old customers who has good borrower of the banks. And they are cont inuing with the bank.
2. In saurashtra region many few co-operat ive banks has a large number of customers in th is loan segment.
3. Bank also provides loan faci l i ty on import machiner ies. So customers have no problem for other agents for import the machiner ies.
Cons.
1. Bank has a str ic t ly ru les and regulat ion of RBI so bank has l imi tat ion for lending money for customer.
2. Bank’s area of work is not large so banks cant ’s capable to give large amount of money l ike nat ional ize and capable pr ivate banks.
3. Rate i f interest is make di f f icul ty in way of easy f inance to customers.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 27
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Gold loan
Only co-operat ive bank who give th is type of loan. For personal requirement th is loan wi l l lend by bank In the secur i t ies gold jewelry put. Bank wi l l count the rate of gold in regular t ime base and borrower wi l l get
70 % of gold’s amount in to the loan. Maximum amount of loan in c i ty is Rs.50,000/- and out of c i ty wi l l be
Rs.20,000/- wi l l lend by bank. Rate of interest is 11% and the per iod of repayment is 26 months. Minimum 21 carat pure gold wi l l require.
Compare to others it’s,
Pros.
1. Only co-operat ive bank in th is region which are provide th is faci l i ty .
2. A persons who need money in emergency they has easy opt ion of th is loan.
3. Bank has also benef i ts of gat ing a large numbers of customers in th is segment.
Cons.
1. The amount of loan is less so many customers are going for other types of loan
Loan against NSV,KVP,LIC policy and F.D.
For emergency requirement of customers.
Borrower’s name’s NSC,KPV,LIC pol ices are require in secur i t ies’ of th is loan.
Loan wi l l be providing by overdraf t . and no l imi t for f inance.
Rate of interest is NSC/KVP+2% and LIC pol icy-10 %.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 28
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Compare to others it’s,
Pros.
1. Bank’s customers have a good opt ion for internal f inance from banks because they are already FD in bank.
2. No l imi tat ions for f inance so bank is suf f ic ient to borrow money as much borrower is needed.
3. Banks has no more r isk in th is lending money because of guarant ied documents.
Cons.
1. Rate of interest is h igh then other banks. So customers are less interested in th is loan.
Mortgage loan (social reason / emergency borrowing)
For borrowers’ social responsibi l i ty / emergency requirement and in emergency purpose any reason wi l l a l lowed.
Borrowers’ income with fami ly must be more than Rs.2,00,000/- and for govt.severnt gross monthly income wi l l be Rs.15,000/- or more.
In the secur i t ies borrowers’ f ixed assets evi table mortgage and one guarantor require.
Loan wi l l be given f ixed assets ’ valuat ion’s 70 % maximum. Or maximum in amount Rs.5,00,000/-
Rate of interest wi l l be 13 % and repayment t ime per iod is maximum 60 months.
Compare to others it’s, Pros.
1. Easy to borrowing from bank because of no more processing t ime and charge.
2. Bank taken guarant ies so bank has not worr ied for that loans’ repayments.
Cons.
1. Now days most of banks are providing these faci l i ty so compet i t ion is make di f f icul ty to gat ing customers.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 29
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
2. Bank’s area of work is l imi ted so i t can’ t compute in good ways.
Small businesses & industries loan
Purpose of th is loan is requirement of current assets l ike stock and money for smal l industr ies and retai ls t raders.
Business wi l l s tar t minimum from three years. Loan wi l l provide by overdraf t . Require documents for these loan are f ixed assets l ike bui ld ing or
machinery’s mortgage and one guarantor. Loan amount was maximum in Rs.10,00,000/- or annual sel l ing’s 25 %
or current asset ’s 80 % or f ixed asset ’s 70 % whichever is less. Rate of interest is 13 %. Only on rule is g ive stock-sheet one t ime in the year.
Compare to others it’s
Pros.
1. Rate of interest is less compet i t ive for other banks and f inancial inst i tut ions.
2. RNSB more ef fect ive in th is segment because i ts main customers come forms smal l businessmen and smal l industr ia l is t .
3. Loan is provided from of overdraf t so bans have also benef i t of not lend lots of money in one t ime .
Cons.
1. Government agencies are most concentrate on growth of SSI so they are provide loan lowest interest rate so bank’s customers are cuts.
2. In the region of saurashtra where SSI is in large number banks can’ t able to provide lots of loan for them because of l imi tat ion of RBI.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 30
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Educational loan
Student of any Govt. approve Universi t ies, Medical , Engineer ing, Management or any professional courses as wel l as any post graduat ion courses can be got.
I f s tudents wants to study with in India and outs ide the India are Rs.7.5lakhs and Rs.15lakhs respect ively.
Loan is included al l the amount re lated with the study l ike course fee, hostel fee, cost of books etc.
Rate of interest is 9.5% Interest should be paid regular ly f rom the date of passing loan. The complet ion of course, af ter 3 months, student must be paid the loan
in 60 equal instal lments. Loanee as wel l as guarantors should be the member of RNSB.
Compare to others it’s
Pros.
1. Rate of interest is very law compare to other nat ional ize and pr ivate banks.
2. Procedure for grant ing is easy.
3. There is rebate faci l i ty i f we are paying loan instal lments wi th study. ( 2% rebate )
Cons.
1. Only member of RNSB takes educat ional loan from the bank.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 31
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Loan for RNSB’s staff
Vehicle loan
With out interest For two wheelers maximum Rs.50000/- For four wheelers there are no l imi ts in loan amount. Repaid wi th in 5 years or service t ime of employee in organizat ion which
ever is less. Employees can get th is loan 3 t imes dur ing their service per iod.
Housing loan
Rate of interest 6.5% for the f i rst t ime and second t ime rate of interest is 7.5%.
Repayment of loan is 20 years or service t ime of employee in organizat ion which ever is less.
No l imit for loan amount to employee.
Festival loan
Rate of interest is n i l . Time durat ion for grant ing th is loan is only one year. Maximum amount is Rs.5000 for taking th is loan. Repayment in 10 equal instal lments. This is g iven most probably in month of October and November.
Surety loan
Surely loan to employees maximum up to Rs.15000. Guarantors are staf f members only. Other terms and condi t ions remain same as per personal surely loan.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 32
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Housing equipment loan
Housing equipment loan to employees are maximum up to Rs.20000. Rate of interest is 6%. Time durat ion of repayment of loan is 60 instal lments. Guarantors are only staf f members.
Overdraft system to employee
Rate of interest is 11%.( PLR – 1% ) Time durat ion of loan amount is 5 years. Amount of loan, for the level of employee
Sub staf f Rs.100000Cler ical staf f Rs.110000Off icers Rs.120000
Limit of overdraf t reduced by every month.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 33
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Rate of interest on Advances from 1 st April 2007
No. Types of loan Int. rate Time duration In months
Instal lmentPer Rs.1000
A Security group vise(machinery loan, c.c. , mass stock)
1 Plat inum group150%secur i ty of loan amt.
11.5% 4066120
30.4520.7714.34
2 Gold group100%secur i ty of loan amt.
12.5% 4066120
30.9321.2814.34
3 Si lver groupLess than 100%secur i ty of loan amt.
14% 4066120
31.6722.0715.82
B Name of loans & advances1 Personal surety loan publ ic 15% 40 31.922 Personal surety loan staf f 15% 66 22.343 Smal l t raders and shopkeepers
loans12% C.C. C.C.
4 Vehic le loan 13% 40 32.005 Cash credi t 13% to 15% C.C. C.C.6 Land and bui ld ing loan
Up to Rs.200000More than Rs.200000
13%14%
144144
14.0514.37
7 Loan for parching house equipment
13% 66 21.54
8 Gold loan 11% 26 43.639 Loan on NSV, KVP, LIC NSV/KVP+2%
LIC 10%O.D. O.D.
10 Mortgage loan any purpose 13% 36 35Social purpose 13% 60 23
11 Loan on F.D. F.D. + 1% F.D. t ime 12 Loan on Demat share 11% 24 46.8413 Nagar ik car loan yojana 11% 48 26.08
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 34
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
LOAN PROCEDURE
1. Application
2. Shakh Report
3. Loan Report
4. Inspection
5. Committee Approval
6. Letter of Condition
7. Documentation
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 35
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
1. APPLICATION
A customer required any advances from a bank have to apply for the same.
I t is a compulsory for Rajkot Nagar ik Sahakar i Bank that the appl icant must be the member or share holder.
In the appl icat ion form bank need pr imary informat ion about borrower and guarantor.
Income proof a lso required.
2. SHAKH REPORT
I t is a conf ident ia l report prepared by bank for the members who want to take a loan.
In the shakh report loanee’s f inancial posi t ion and also guarantor ’s f inancial posi t ion are ment ioned.
In the case of industr ies loan turn over report wi l l required.
3. LOAN REPORT
After the shakh report approves, customer’s appl icat ion go for the loan report .
Bank analyses the appl icat ion throughout.
And report wi l l go to next stage.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 36
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
4. INSPECTION
For knowing correct p icture bank’s of f icers are make an inspect ion of property of customers.
But i t is done in case of total ly new and doubtfu l customer’s appl icat ion.
For regular customer, i t is not required.
5. COMMITTEE APPROVAL
After complet ing everything and i f appl icat ion found correct than loan report should to come along with commit tee.
The system of Rajkot Nagar ik Sahakar i Bank is d iv ided into di f ferent commit tee for sect ioning di f ferent amount of advances.
I f commit tee members feel that the f i le of appl icant for advances is correct and there is not any problem in grant ing loan than they sanct ion the loan.
I f an amount of a loan is less than the actual appl icat ion amount and i f a customer wants the amount which is ment ioned in appl icat ion form at that t ime customer have to prepare one more appl icat ion to the commit tee to sanct ion the fu l l amount.
After the second appl icat ion commit tee th ink over the new appl icat ion and i f they feel sat isf ied than they sanct ioned fu l l amount of
appl icat ion.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 37
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
6. LETTER OF CONDITION
In the let ter of condi t ion bank includes the rate of interest , instal lments, deposi ts and other pr imary rules.
Steps taken by the bank i f customer is not able to repay the loan are also ment ioned.
7. DOCUMENTATION
Document means any matter expressed or descr ibed upon any substance by means of let ters, f igures, or marks or by more
than one of those means intended to be used or which may be used for the purpose of recording that matter .
At Rajkot Nagar ik Sahakar i Bank di f ferent documents are required for d i f ferent Loans / Advances l ike promissory note, let ter of guarantee, equi table mortgage and Hypothecat ion of vehic le etc.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 38
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Margin money
1. When bank grant loan, the appl icant have to keep same amount in his account as deposi t which is cal led margin money or s imply deposi t to loans.
2. This deposi t is useful when appl icant fa i ls to repay the loan. At than t ime bank are for fe i ted th is deposi ts.
3. After the repayment of loan the amount of deposi ts should be given back to appl icant.
4. Margin money should be ei ther in form of share deposi ts of in term of loan deposi ts.
5. The margin money fora. Personal surety loan -5% of advancesb. Other loans -2.5% of advances
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 39
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
RECOVERY PROCEDURE
A banker has not merely to advance money to t rade, industry and commerce but has to ensure that money which is advanced comes back to him / her.
I f money advances is not recovered, the banker is l ikely to suf fer a loss and wi l l not be able to balance l iquidi ty wi th prof i tabi l i ty . I t is , therefore, necessary for a banker to keep a c lose watch over advances granted by him to di f ferent types of borrowers.
There are numbers of occasions when a banker wi l l th ink i t necessary to ask a borrower to repay the advances, which are l ike below;
1. Death of borrower or guarantor.
2. Insolvency of borrower or guarantor.
3. Dissolut ion of partnership.
4. I f there is a adverse report in the market about the f inancial soundness of borrower.
5. I f change in pol icy is announced by t ime to t ime from the Reserve Bank of India.
6. There may be some other occasion also, when an advance my have to be recover. These may be under the RBI direct ive or under the Government Legis lat ion.
7. I f the borrower fa i ls to repay, the banker should give a not ice preferably through a lower by register post cal l ing upon the borrower to repay the advances, fa i l ing which he may be proceeded against according to the law.
8. I f necessary the borrowers may be advised or persuaded to repay the advance in instal lments to be f ixed up in consul t ing wi th borrower.
9. The legal course wi l l be avai lable to the banker against the borrower depends upon the type of borrower and the type of secur i ty of fered as a cover for the advances.
10.The banker wi l l therefore have to take appropr iate legal act ion keeping in mind the type of borrower and the type of secur i ty.
The most important point to be noted is that as a banker, whi le fo l lowing the recovery procedure the interest of the bank should always be uppermost in h is mind.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 40
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
RNSB’s Recovery management
For banking industry Recovery has become most precious matter . Recovery against advances has become di f f icul t task for banking industry in recession.
Recovery is considered core act iv i ty of banking industry. To make al l t ransact ion and services smooth , recovery is most desirable act iv i ty to be carr ied out forceful ly .
“Recovery Management is consist ing of the funct ions of acquir ing back what the bank has advanced with the pr incip le amount as wel l as interest on same.”
Rajkot Nagar ik Sahakar i Bank is Zero NPA bank in saurashtra region. I t ’s a recordable movement in any co-operat ive banks.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 41
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Process of Recovery:
I f three instal lment are out standing -
# Not ice through branch of f ice
# Personal v is i t and meet ing
In no response –
# Not ice through Advocate
St i l l no ef fect –
# Claim through court
# I f party is ready, out of court set t lement is done.
Otherwise –
# After complet ion of formal i t ies, bank wi l l get the order of
for fe i ture of the secur i ty f rom the court to recover the dues.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 42
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Identification of Non-Performing Advances
How account become non-performing asset ?
1. Term loan
I f interest or instal lment of pr incipal remains past due for a per iod of any one quarter , i t becomes NPA. Past due means i t is an amount due under any of the faci l i ty but not paid wi th in 30 days af ter i t become due.
2. Cash credit and overdrafts
I f the account remains out of order for a per iod of any one quarter , i t becomes NPA. Out of order means the out standing balance cont inuously in excess of the sanct ioned l imi t or drawing power. In th is case, there is no credi t cont inuously for three months or credi t is not enough to cover the interest debi ted dur ing the same per iod.
3. Bill purchasing and discounting
I f the bi l l remains over due and unpaid for the per iod of one quarter dur ing the year, i t becomes NPA.
4. Other credit facility
I f any amount to be received remains past due for a per iod of one quarter dur ing the year, i t becomes NPA.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 43
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Non-Performing AssetsNPAs are loans given by bank or f inancial inst i tute where the borrower defaul ts or delays payments of interest or repayment of pr incip le . Assets here also include leased assets. An NPA was def ined a credi t faci l i ty in respect of which interest and instal lment of pr incip le has remained ‘past due’ for a speci f ic per iod of t ime. The speci f ied per iod in a phase manner is as under:
Year ending If interest/ instal lment has remained unpaid, account becomes NPA
1993 4 quarters(365 days)
1994 3 quarters(270 days)
1995 onwards 2 quarters(180 days)
From 2004 1 quarters(90 days)
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 44
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
MISSION 0% (ZERO) NPAThis is an extraordinary scheme for the development of RNSB. Last year when th is concept was come into the l imel ight in met ing of d i rectors then th is scheme was establ ished in suddenly in bank. In th is mission RNSB’s al l the staf f members took upon themselves of their own vol i t ion the task of recovery and a zero NPA project was launched under the guidance of Senior Off icers of Head Off ice & the directors of the Bank.
During th is year RBI had t ightened the NPA norms for defaul t f rom 180 days to 90 days. Despi te th is t ightened norms, the ef for ts put in by the staf f members on their own helped the bank ef fect substant ia l recover ies of NPAs dur ing the year and also prevent s l ippage toward NPAs.
1. This is a f i rst t ime and type mission in any co-operat ive banks history where al l banks employee are work in same mission in same way.
2. No one bank could work on th is funct ion by th is way. So i t ’s an achievement of bank to improve i t s taf f support for th is type of mission.
3. For th is work employee are gett ing mot ivat ion by bank through the t rophy and the other pr izes.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 45
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Progress at Glance
Bank is lend i t ’s 83% f inance to middle c lass and lower c lass customers.
Total advances give by bank was in year 2006 Rs.430.91crores and in 2007 i t is Rs.504.94crores.
CHART SHOWING ADVANCES
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 46
GROWTH IN ADVANCES RS. IN CRORES
350
400
450
500
550
Adavances
Adavances 421.55 428.99 430.91 504.94
2003-04 2004-05 2005-06 2006-07
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
CHART SHOWING SECURITY WISE ADVANCES
SECURITY WISE ADVANCES RS. IN CRORES.
12.22 58.37
10.66
158.09
229.19
32.32.39
1.72
Hypothecation ofstockHypothecation ofPlant & MachinaryPersonal Surity
Shares
Equitable Mortgageof Land & BuildingPledge of gold
pledge of FD
Other Security
The chart above shows secur i ty wise advances in Rs. In crores.
The maximum share of total advances is of Hypothecat ion of stock of Rs. 229.19 crores
The share of equi table mortgage of land and bui ld ing of Rs. 158.09 with the second number among al l other secur i t ies.
The least share is of personal surety of Rs. 1.72 crore
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Chapter 5 - Theoretical Aspects of the Study
SWOT ANALYSIS
STRENGTH
RNSB was star ted at the in i t iat ives wi th a smal l capi ta l of Rs.4890 and membership of 59 persons but at present bank has developed in manifo lds wi th the t ime. Membership (share holder) of bank is mount ing towards 2, 50,000/- which is record by i t sel f & provides an example of how a mass movement can be turned in to the instrument for social enl is tment of Government of India.
RNSB does other act iv i t ies such Demat safe Deposi tory Walt , custodial service, p ledge etc. that increase the strength of RNSB.
Promoters of RNSB are reputed persons and they al l are f inancial ly sound. No. one of them is involved in speculat ive act iv i ty.
Well spread branch network across the Gujarat and one branch is at Mumbai a lso.
More than 50 years exper ience of banking act iv i t ies.
Qual i f ied manpower. .
Banking services being the core business expert ise in render ing the service.
I t is leading not only in Rajkot but a lso in al l Saurashtra’s co-operat ive bank.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
WEAKNESS
Very l i t t le knowledge about computer ized banking among old staf f .
Lack of personal ized service and direct market ing staf f .
I t is very smal l uni t of industry i t is very di f f icul t to Compete wi th giant pr ivate Sector banks, nat ional ized banks, and mult inat ional banks.
Lack of competent staf f on several important department such as legal , loan, recovery etc.
Recrui tment is not on the professional basis and also i t is same far promot ion pol icy hence there are very less no. of . Ef f ic ient staf f at senior levels.
Technological ly i t is far behind from other banks.
OPPORTUNITY
Developing of banking industry wi l l g ive i t more business opportuni t ies.
Co-operat ive banks can reach easi ly to rural are, which is d i f f icul t for pr ivate Banks.
Providing better qual i ty service, i t can at t ract b ig c l ient .
Convert ing co-operat ive bank into pr ivate Bank. I t can increase i ts strength.
More states can also be covered.
Adopt ion of modern techno.
Logy to remain compet i t ive.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
THREATS
Increasing compet i t ion in th is business no. of compet i tors came in recent t ime.
Co-operat ive sector is neglected by government Constant ly.
Cutthroat compet i t ion by local p layer in terms of service charges. Lack of technological v is ion, lack of v is ion of seeing future.
Pvt. Bank can be big compet i tors and even i f we compare i t wi th schedules bank than also i t ’s compet i tors are in very sound condi t ion.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
BCG MBCG MATRIXATRIX
BCG Growth- Share Matrix
STAR QUESTION MARK
CASH COW DOG
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 51
MARKET
GROWTH
RATE
RELATIVE MARKET SHARE
Loans and advances in co-operative sectorFixed Deposite
Demat faci l i tystamp wending
SAVINGS A/C
CURRENT A/C.
LOW
INSURANCE
H
I
G
H
Low
HIGH
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Chapter 6 – DATA ANALYSIS & INTERPRETATION
We Col lect Data of 50 Customer’s of Rajkot Nagar ik sahakar i Bank for knowing sat isfact ion level of Customer’s f rom i t ’s service.
Q-1 Occupation of the Customer?
Criteria No.Business 20Professional 6Service 2Ret i red 10Student 10Other 2Total 50
OCCUPATION
0%0%0%0%0%0%
40%
12%4%
20%
20%
4%
BUSSINESS
PROFESSION
RETIER
SERVICE
STUDENT
OTHER
Analysis:
From the above content we can see that the research that contain the data of businessman, professional people, service c lass person and ret i red persona and we also include student for knowing actual data.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Q-2 Since How long you deal with the Rajkot Nagarik sahakari Bank?
Criteria Less than 1 Yr. 1 to 5 Yr. 5 & AboveNo. of customer 15 15 20
LOYALTY
40%
30%
30%
LESS THAN 1 YEAR
1 TO 5 YEARS
MORE THAN 5 YEARS
Analysis:
From the given data we can analyze that near about 40 % of customer who deals in bank s ince more than 5 year and 30% of customer who are deals wi th 1 to 5 Year and 30% of customer who deals wi th less than 1 year and they are very much sat isf ied wi th the services of banks and also convince to invest in only Rajk iot Nagar ik Sahakar i bank.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Q-3 How often you visit in Rajkot Nagarik sahakari Bank.
Criteria No.Dai ly 13Two Days in Week 7Weekly 5Not Fix 25Total 50
CONTACT WITH BANK
26%
14%
10%
50%
DAILY
2 DAYS IN A WEEK
WEEKLY
NO FIX
Analysis:
From above given research we can f ind that 26% of customer v is i ts bank dai ly and 14% of customer that v is i ts the bank 2 days in week and 10% of customer v is i t the bank week and 50% of customer are not f ix to v is i t bank they come to bank to make transact ion according to their need.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Q-4 With Which Product you dealing in Rajkot Nagarik sahakari Bank?
Option No.Saving A/c. 30Current A/c. 72Recurr ing A /c. 0Sp.saving A/c. 9C.C.A/c. 28Other 11Total 150
TYPES OF ACCOUNT
44%
30%
0%
10%
8%
8%
SAVING A/C
CURRENT A/C
RECURRING A/C
SP. SAVING A/C
CASH CREDIT
OTHER
Analysis:
The data which we col lected is contain the 30% of current account customer whi le 44% of saving a/c and other customer holding di f ferent product of bank l ike 8% customer holding cash credi t account, 10% customer holding special saving account and approximately 8% customer holding other types of account .
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Q. 5 Have you take any loan from Rajkot Nagarik Sahakari Bank?
Yes 33
No 17
Total 50
LOANS
66%
34%
YES
NO
Analysis:
The Data which we col lect I contain the 66% having loan from bank and 34% costumer has not taking loan from RNSB.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Q.6 How much time taken by bank to pass loan?
2 Days 33
4 Days 99
1 week 1111
More than 1 week 1010
Total 33
TIME DURATION
9%
27%
34%
30%
2 DAYS
4 DAYS
1 WEEK
MORE THAN WEEK
Analysis:
From above given research we can f ind that 34% loan passing in 1 week, 30% loans are passing trough more than 1 week, 27% loans are passing in 4 days and 9% loans are passing in 2 days.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Q-7 What is the level of Satisfaction from Rajkot Nagarik Sahakari Bank?
Option No.
Highly Sat isf ied 11
Sat isf ied 25
Indi f ferent 13
Dissat isf ied 1
Highly Dissat isf ied 0
Total 50
CONSUMER SATISFACTION
50%
26%22%
2% 0%
HIGHLY SATISFIED
SATISFIED
INDIFFERENT
DISSATISFIED
HIGHLY DISSATISFIED
Analysis:
From this research quest ion, we can analyze sat isfact ion level of the customer is
near about 50% of the customers are sat isf ied wi th the service of the bank and
near about 20% of customer are highly sat isf ied wi th the services given by
RNSB.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Chapter 7 – FINDINGS
FINDINGS
This chapter contains some of the f indings f rom my study of selected Rakot Nagar ik Sahakar i Bank (Urban Co-operat ive Banks).
1. The strong points of RNSB is i t ’s f inancial strength, amount of deposi tors and good services.
2. In some of the area l ike loan, f i rm is very r ig id so, f lexib i l i ty is needed.
3. One of the important point is that new cl ient comes through the recommendat ions of the exist ing customers.
4. The main th ing is that RNSB is lacking the market ing strategy in the banking area.
5. The new cl ient must be member of RNSB (Share Holder) .
6. In the area of Loans and Advances, RNSB having a least rate of interest among the nat ional ize as wel l as co-operat ive sector.
7. The tendency to donate generously to inst i tut ions by the Board of Directors of Rajkot Nagar ik Sahakar i Bank is commendable. Some of inst i tut ions to whom huge contr ibut ions are given are V.V.P. Engineer ing Col lege, Satya Sai Heart Hospi ta l , Ashok Gondhia Memorial Hospi ta l (Now Wockhart) etc.
8. Pract ice of easy avai labi l i ty of of f ice bearers of the Rajkot Nagar ik Sahakar i Bank Ltd. For the members, a customer or loanees is wel l adopted. This also serves as the intel l igent agency to keep a watch on the ways and means how the Bank advances are ut i l ized.
Chapter 8 - SUGGESTIONS
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
There are certa in glar ing suggest ions by fo l lowing that there can be better development of Rajkot Nagar ik Sahakar i banks.
1. Many people wants the on- l ine demat faci l i ty f rom the bank.
2. Bank should also provide ATM, Phone Banking and Net-Banking.
3. I t is a lso required to increase working hours not l ike pr ivate bank but more than the other co-operat ive banks because i t creates very good image in the mind of the people.
4. Banks area of working is l imi ted so, people wants more branches at urban area l ike Ahmedabad and other area of Gujarat .
5. RNSB must have to adopt new and advance technology, by th is adopt ion bank can provide better qual i ty service and process and saving of t ime.
6. Bank’s some loan schemes are very good, but the amount of that loans are lower than the other banks. So, customers are at t ract towards other banks.
7. Bank has to take customer sat isfact ion review per iodical ly l ike some pr ivate banks.
8. To improve ef f ic iency of employees of Co-operat ive Banks, a fu l l f ledged tra in ing centre for the benef i ts of the employees should be establ ished and regular ly run by the leading Co-operat ive Bank v iz. Rajkot Nagar ik Sahakar i Bank Ltd.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
QUESTIONNAIRE FOR RNSB USING CUSTOMER
This research is only for purpose of studying the satisfaction level of customers. The information provided by you is not used for any other purpose. As I am student of MBA, I surveying about the satisfaction level of customer’s of RNSB. I expected your kind cooperation for filling this questionnaire.
( 1 ) General Information of Customers :-A.) Name :-
______________________________________________B.) Address :-
____________________________________________________________________________________________
C.) Contact No. ___________ _______________________
D.) Occupation :-
Business Profession Retire
Service Students Other
E.) Yearly Income :-____ _______________________
( 2 ) Since how long you deal with RNSB ?
(A.) Less than 1 year
(B.) 1 to 5 years
(C.) More than 5 year
( 3 ) how often have you been in contact with RNSB ?
Daily Two days in a week
Weekly No fix
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
( 4 ) Which type of account do you have in RNSB ?Saving a/c Current a/c Recurring a/c
Sp. Saving a/c Cash Credit Other
( 5 ) Your Selection of Bank is Based on ( Give Rank 1 to 5 )
(A.) Safety
(B.) Service
(C.) Reputation
(D.) Rates
(E.) Proximity
( 6 ) Have you take any loan from RNSB?YES NO
( 7 ) IF YES than describe it.
( 8 ) How much time taken by bank to pass loan?
2 days 4 days
1 week more than 1week.
( 9 ) Do you deal with other Bank ?
Yes No
( 10 ) If yes, where ?_______________________________________________________
( 11 ) Do you find any difference in service of RNSB with comparison of other Banks ?
Yes No
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
( 12 ) If yes, state the Difference :
______________________________________________________
( 13 ) What is the level of satisfaction about service provided by RNSB ?
(A.) Highly Satisfied
(B.) Satisfied
(C.) Indifferent
(D.) Dissatisfied
(E.) Highly Dissatisfied
( 14 ) Have you faced any difficulty with RNSB ?
Yes No
( 15 ) Was it Solved ?
Yes No
( 16 ) In what time ?
1 day 2 days
Week more than week
( 17 ) Would you Recommend RNSB to others ?
Yes No
( 18 ) Suggestions :______________________________________________________
__________________________________________________________________________________________________________________________________________________________________
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
BIBLIOGRAPHY
Websites
www.rnsbindia.com
www.rbi.com
www.google.com ( search engine )
Reference Books & Journal
Financial Management by Prasanna Chandra 5 t h edit ion
Banking & Finance
Bank’s Document
Annual Report 2006-07
Information Collected from other bank.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
TABLE OF CONTENT
CHAPTERNO.
CHAPTER NAME Page no.
Declarat ion I
Preface II
Acknowledgement III
Execut ive summary IV
1 Introduct ion 1
2 Research Methodology2.1 Research purpose2.2 Scop of study2.3 Sources of data2.4 Sampl ing design2.5 Limitat ion of study
2
3 Industry prof i le 3.1 Ear ly h istory of banking 3.2 Types of Bank 3.3 Di f ferences of commercial bank and co- operat ive bank
5
4 Company prof i le4.1 History of RNSB4.2 Social contr ibut ion4.3 Features4.4 Organizat ional structure4.5 Types of loans and advances4.6 Loan procedure4.7 Margin money4.8 Recovery procedure4.9 Non Performing Assests4.10 Progress at Glance
11
5 Theoret ical Aspects of the Study 48
6 Data analysis and interpretat ion 52
7 Research Findings 59
8 Suggest ions 60
9 Annexure 61
10 Bibl iography 64
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 65
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
AGRAND PROJECT REPORT
ON
“FUNDAMENTAL ANALYSIS OF FOREIGN EXCHANGE RATES”
As a Part of Partial Fulfillment of the MBA Degree2006-08
Guided ByProf. Abhishek Ranga
Prof. Sonu Gupta
Prepared ByMayur Vaniya (114)Deepak Danger (15)
Submitted To
S. K. Patel Institute of Management & Computer Studies
GANDHINAGAR
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR 66
LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
ACKNOWLEDEMENT
We, the students of S.K.Patel Institute of Management & Computer
Studies are extremely thankful to our institute for giving us an
opportunity to undertake this Grand Project.
We are very much thankful to and their supervision and patiently
responding to our various queries and for his valuable guidance. We
are also thankful to our Director Prof. S.Chinnam Reddy & Prof. Sonu
Gupta and Prof. Abhishek Ranga (project guide) and Prof. Prakas
Chawala (co-ordinator) for providing us the helpful support for
completing the report in a for given schedule. Thanks for their
benevolent support and kind attention. Their valuable guidance at
each and every stage of the project always gave a Phillip to our
enthusiasm.
Last but not the least we express our gratitude to all people who are
directly or indirectly involved in the preparation of this report.
Deepak Danger
Mayur vaniya
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
EXECUTIVE SUMMARY
The rapid industrialization, advancement in technology and
communication facilities, the availability of rapid means of
transportation has all contributed towards the globalization of business
across the frontiers of countries. There have been new innovations in
the products developments. The government of India has also opened
Indian economy. Various fiscal, trade and industrial policy decisions
have been taken and new avenues provided to foreign investors like
FII’s and NRI’s etc. for investment especially infra-structural sectors
like power, and telecommunications etc.
This projects attempts to study the intricacies of the Foreign Exchange
Market and to develop Fundamental model of exchange rate
prediction. The main purpose of this study is to give a better idea and
the comprehensive details of foreign exchange market and risk
management and how to predict exchange rate.
The project starts with the various concept and system used in the
foreign exchange market in the world. It also highlights about the
exchange rate system used in various countries till date. The second
part of the study focus on fundamental model of exchange rate
predication and risk management techniques available.
The project then highlights the various hedging tools used by various
banks and individuals to hedge their risk. The major hedging tools
included are forward, options, swaps and futures.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Sr.No. Particulars Page no.
1. Introduction
1.1 Foreign Exchange Overview.
1.2 About Foreign Exchange Market.
1.3 Participants in foreign exchange
2. Research Methodology
2.1 Main objective
2.2 Data collection
2.3 Data analysis
2.4 Limitations of the Study.
3. Industry Profile
3.1 Exchange Rate System.
3.2 Fundamentals in Foreign Exchange
3.3 Hedging Tools
4. Theoretical Aspect of the study
4.1 Forecasting Exchange Rates
5. Research Findings and Conclusions
5.1 Data Analysis
5.2 Conclusions
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
6. Bibliography
6.1 Name of Books
6.2 Name of Bulletins
6.3 Name of Websites
6.4 Search engine
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
INTRODUCTION
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
FOREIGN EXCHANGE MARKET OVERVIEW
In today’s world no economy is self sufficient, so there is need for
exchange of goods and services amongst the different countries. So in
this global village, unlike in the primitive age the exchange of goods
and services is no longer carried out on barter basis. Every sovereign
country in the world has a currency that is legal tender in its territory
and this currency does not act as money outside its boundaries. So
whenever a country buys or sells goods and services from or to
another country, the residents of two countries have to exchange
currencies. So we can imagine that if all countries have the same
currency then there is no need for foreign exchange.
NEED FOR FOREIGN EXCHANGE
Let us consider a case where Indian company exports cotton
fabrics to USA and invoices the goods in US dollar. The American
importer will pay the amount in US dollar, as the same is his home
currency. However the Indian exporter requires rupees means his
home currency for procuring raw materials and for payment to the
labor charges etc. Thus he would need exchanging US dollar for rupee.
If the Indian exporters invoice their goods in rupees, then importer in
USA will get his dollar converted in rupee and pay the exporter.
From the above example we can infer that in case goods are bought or
sold outside the country, exchange of currency is necessary.
Sometimes it also happens that the transactions between two
countries will be settled in the currency of third country. In that case
both the countries that are transacting will require converting their
respective currencies in the currency of third country. For that also the
foreign exchange is required.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
ABOUT FOREIGN EXCHANGE MARKET
Particularly for foreign exchange market there is no market place
called the foreign exchange market. It is mechanism through which
one country’s currency can be exchange i.e. bought or sold for
The currency of another country. The foreign exchange market does
not have any geographic location.
Foreign exchange market is described as an OTC (over the counter)
market as there is no physical place where the participant meets to
execute the deals, as we see in the case of stock exchange. The
largest foreign exchange market is in London, followed by the New
York, Tokyo, Zurich and Frankfurt. The markets are situated throughout
the different time zone of the globe in such a way that one market is
closing the other is beginning its operation. Therefore it is stated that
foreign exchange market is functioning throughout 24 hours a day.
In most market US dollar is the vehicle currency, viz., the currency
sued to dominate international transaction. In India, foreign exchange
has been given a statutory definition. Section 2 (b) of foreign exchange
regulation ACT,1973 states:
Foreign exchange means foreign currency and includes :
All deposits, credits and balance payable in any foreign currency
and any draft, traveler’s cheques, letter of credit and bills of
exchange. Expressed or drawn in India currency but payable in
any foreign currency.
Any instrument payable, at the option of drawee or holder
thereof or any other party thereto, either in Indian currency or in
foreign currency or partly in one and partly in the other.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
In order to provide facilities to members of the public and foreigners
visiting India, for exchange of foreign currency into Indian currency
and vice-versa. RBI has granted to various firms and individuals,
license to undertake money-changing business at seas/airport and
tourism place of tourist interest in India. Besides certain authorized
dealers in foreign exchange (banks) have also been permitted to
open exchange bureaus.
Following are the major bifurcations:
Full fledge moneychangers – they are the firms and
individuals who have been authorized to take both, purchase and
sale transaction with the public.
Restricted moneychanger – they are shops, emporia and
hotels etc. that have been authorized only to purchase foreign
currency towards cost of goods supplied or services rendered by
them or for conversion into rupees.
Authorized dealers – they are one who can undertake all types
of foreign exchange transaction. Banks are only the authorized
dealers. The only exceptions are Thomas cook, western union,
UAE exchange which though, and not a bank is an AD.
Even among the banks RBI has categorized them as follows:
Branch A – They are the branches that have nostro and vostro
account.
Branch B – The branch that can deal in all other transaction but
do not maintain nostro and vostro a/c’s fall under this category.
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Branch C - such branches cannot do anything with forex
business.
For Indian we can conclude that foreign exchange refers to
foreign money, which includes notes, cheques, bills of exchange,
bank balance and deposits in foreign currencies.
PARTICIPANTS IN FOREIGN EXCHANGE MARKET
The main players in foreign exchange market are as follows:
1. CUSTOMERS
The customers who are engaged in foreign trade participate in
foreign exchange market by availing of the services of banks.
Exporters require converting the dollars in to rupee and importers
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
require converting rupee in to the dollars, as they have to pay in
dollars for the goods/services they have imported.
2. COMMERCIAL BANKS
They are most active players in the forex market. Commercial bank
dealing with international transaction offer services for conversion
of one currency in to another. They have wide network of branches.
Typically banks buy foreign exchange from exporters and sells
foreign exchange to the importers of goods. As every time the
foreign exchange bought or oversold position. The balance amount
is sold or bought from the market.
3. CENTRAL BANK
In all countries Central bank have been charged with the responsibility
of maintaining the external value of the domestic currency. Generally
this is achieved by the intervention of the bank.
4. EXCHANGE BROKERS
Forex brokers play very important role in the foreign
exchange market. However the extent to which services of
foreign brokers are utilized depends on the tradition and practice
prevailing at a particular forex market center. In India as per
FEDAI guideline the Ads are free to deal directly among
themselves without going through brokers. The brokers are not
among to allowed to deal in their own account allover the world
and also in India.
5. OVERSEAS FOREX MARKET
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LOAN AND ADVANCES SYSTEM THE SMALL MAN’S BIG BANK RNSB
Today the daily global turnover is estimated to be more
than US $ 1.5 trillion a day. The international trade however
constitutes hardly 5 to 7 % of this total turnover. The rest of
trading in world forex market is constituted of financial
transaction and speculation. As we know that the forex market is
24-hour market, the day begins with Tokyo and thereafter
Singapore opens, thereafter India, followed by Bahrain, Frankfurt,
paris, London, new york, Sydney, and back to Tokyo.
6. SPECULATORS
The speculators are the major players in the forex market.
Bank dealing are the major pseculators in the forex market
with a view to make profit on account of favorable movement
in exchange rate, take position i.e. if they feel that rate of
particular currento go up in short term. They buy that
currency and sell it as soon as they are able to make quick
profit.
Corporation’s particularly multinational corporation and
transnational corporation having business operation
beyond their national frontiers and on account of their
cash flows being large and in multi currencies get in to
foreign exchange exposures. With a view to make
advantage of exchange rate movement in their favor they
either delay covering exposures or do not cover until cash
flow materialize.
Individual like share dealing also undertake the activity of
buying and selling of foreign exchange for booking short
term profits. They also buy foreign currency stocks, bonds
and other assets without covering the foreign exchange
exposure risk. This also result in speculations.
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Research
Methodology
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Research Methodology
OBJECTIVES
This project attempts
To study the intricacies of the foreign exchange market.
To develop fundamental model of exchange rate prediction.
To know the trend of exchange rate fluctuation.
To know about the various concepts and technicalities in
foreign exchange.
To get the knowledge about the hedging tools used in foreign
exchange.
DATA COLLECTION
Secondary data collection
From 1. Books
2. Websites
3. Journals and Bulletins
DATA ANALYSIS
Data are analyzed by brainstorming
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LIMITATIONS OF THE STUDY
As project concerned with Indo-US data but Rupee is not fully
convertible so monetary approach to exchange rate may lead
to error.
Some data are taken by interpolations so it can have some
amount of error.
Some where in the data are converted from financial year to
Annual form.
Some places data are approximated to match the date as per
requirement.
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INDUSTRY
PROFILE
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EXCHANGE RATE SYSTEM
INTRODUCTION
Countries of the world have been exchanging goods and services
amongst themselves. This has been going on from time immemorial.
The world has come a long way from the days of barter trade. With the
invention of money the figures and problems of barter trade have
disappeared. The barter trade has given way ton exchanged of goods
and services for currencies instead of goods and services.
The rupee was historically linked with pound sterling. India was a
founder member of the IMF. During the existence of the fixed
exchange rate system, the intervention currency of the Reserve Bank
of India (RBI) was the British pound, the RBI ensured maintenance of
the exchange rate by selling and buying pound against rupees at fixed
rates. The inter bank rate therefore ruled the RBI band. During the
fixed exchange rate era, there was only one major change in the parity
of the rupee- devaluation in June 1966.
Different countries have adopted different exchange rate system at
different time. The following are some of the exchange rate system
followed by various countries.
THE GOLD STANDARD
Many countries have adopted gold standard as their monetary system
during the last two decades of the 19th century. This system was in
vogue till the outbreak of world war 1. under this system the parties of
currencies were fixed in term of gold. There were two main types of
gold standard:
1) gold specie standard
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Gold was recognized as means of international settlement for receipts
and payments amongst countries. Gold coins were an accepted mode
of payment and medium of exchange in domestic market also. A
country was stated to be on gold standard if the following condition
were satisfied:
Monetary authority, generally the central bank of the country,
guaranteed to buy and sell gold in unrestricted amounts at the
fixed price.
Melting gold including gold coins, and putting it to different uses
was freely allowed.
Import and export of gold was freely allowed.
The total money supply in the country was determined by the
quantum of gold available for monetary purpose.
2) Gold Bullion Standard
Under this system, the money in circulation was either partly of
entirely paper and gold served as reserve asset for the money supply..
However, paper money could be exchanged for gold at any time. The
exchange rate varied depending upon the gold content of currencies.
This was also known as “ Mint Parity Theory “ of exchange rates.
The gold bullion standard prevailed from about 1870 until 1914, and
intermittently thereafter until 1944. World War I brought an end to the
gold standard.
BRETTON WOODS SYSTEM
During the world wars, economies of almost all the countries suffered.
In ordere to correct the balance of payments disequilibrium, many
countries devalued their currencies. Consequently, the international
trade suffered a deathblow. In 1944, following World War II, the United
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States and most of its allies ratified the Bretton Woods Agreement,
which set up an adjustable parity exchange-rate system under which
exchange rates were fixed (Pegged) within narrow intervention limits
(pegs) by the United States and foreign central banks buying and
selling foreign currencies. This agreement, fostered by a new spirit of
international cooperation, was in response to financial chaos that had
reigned before and during the war.
In addition to setting up fixed exchange parities (par values) of
currencies in relationship to gold, the agreement established the
International Monetary Fund (IMF) to act as the “custodian” of the
system.
Under this system there were uncontrollable capital flows, which lead
to major countries suspending their obligation to intervene in the
market and the Bretton Wood System, with its fixed parities, was
effectively buried. Thus, the world economy has been living through an
era of floating exchange rates since the early 1970.
FLOATING RATE SYSTEM
In a truly floating exchange rate regime, the relative prices of
currencies are decided entirely by the market forces of demand and
supply. There is no attempt by the authorities to influence exchange
rate. Where government interferes’ directly or through various
monetary and fiscal measures in determining the exchange rate, it is
known as managed of dirty float.
PURCHASING POWER PARITY (PPP)
Professor Gustav Cassel, a Swedish economist, introduced this system.
The theory, to put in simple terms states that currencies are valued for
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what they can buy and the currencies have no intrinsic value attached
to it. Therefore, under this theory the exchange rate was to be
determined and the sole criterion being the purchasing power of the
countries. As per this theory if there were no trade controls, then the
balance of payments equilibrium would always be maintained. Thus if
150 INR buy a fountain pen and the samen fountain pen can be bought
for USD 2, it can be inferred that since 2 USD or 150 INR can buy the
same fountain pen, therefore USD 2 = INR 150.
For example India has a higher rate of inflation as compaed to country
US then goods produced in India would become costlier as compared
to goods produced in US. This would induce imports in India and also
the goods produced in India being costlier would lose in international
competition to goods produced in US. This decrease in exports of India
as compared to exports from US would lead to demand for the
currency of US and excess supply of currency of India. This in turn,
cause currency of India to depreciate in comparison of currency of Us
that is having relatively more exports.
FUNDAMENTALS IN EXCHANGE RATES
METODS OF QOUTING RATE
Exchange rate is a rate at which one currency can be exchange in to
another currency, say USD = Rs.48. This rate is the rate of conversion
of US dollar in to Indian rupee and vice versa.
EXCHANGE QUOTATION
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______________________
DIRECT INDIRECT
VARIABLE UNIT VARIABLE UNIT
HOME CURRENCY FOREIGN CURRENCY
There are two methods of quoting exchange rates.
1) Direct methods
Foreign currency is kept constant and home currency is kept variable.
In direct quotation, the principle adopted by bank is to buy at a lower
price and sell at higher price.
2) In direct method:
Home currency is kept constant and foreign currency is kept variable.
Here the strategy used by bank is to buy high and sell low. In India
with effect from august 2, 1993 all the exchange rates are quoted in
direct method.
It is customary in foreign exchange market to always quote two rates
means one for buying and another rate for selling. This helps in
eliminating the risk of being given bad rates i.e. if a party comes to
know what the other party intends to do i.e. buy or sell, the former can
take the letter for a ride.
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There are two parties in an exchange deal of currencies. To initiate the
deal one party asks for quote from another party and other party
quotes a rate. The party asking for a quote is known as’ asking party
and the party giving a quotes is known as quoting party.
The advantage of two–way quote is as under
i. The market continuously makes available price for buyers or
sellers
ii. Two way price limits the profit margin of the quoting bank and
comparison of one quote with another quote can be done
instantaneously.
iii. As it is not necessary any player in the market to indicate
whether he intends to buy or sale foreign currency, this
ensures that the quoting bank cannot take advantage by
manipulating the prices.
iv. It automatically insures that alignment of rates with market
rates.
v. Two way quotes lend depth and liquidity to the market, which
is so very essential for efficient market.
`
In two way quotes the first rate is the rate for buying and another for
selling. We should understand here that, in India the banks, which are
authorized dealer always, quote rates. So the rates quoted- buying and
selling is for banks point of view only. It means that if exporters want
to sell the dollars then the bank will buy the dollars from him so while
calculation the first rate will be used which is
Buying rate, as the bank is buying the dollars from exporter. The same
case will happen inversely with importer as he will buy dollars from the
bank and bank will sell dollars to importer.
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FACTOR AFFECTINGN EXCHANGE RATES
In free market, it is the demand and supply of the currency which
should determine the exchange rates but demand and supply is the
dependent on many factors, which are ultimately the cause of the
exchange rate fluctuation, some times wild.
The volatility of exchange rates cannot be traced to the single reason
and consequently, it becomes difficult to precisely define the factors
that affect exchange rates. However, the more important among them
are as follows:
STRENGTH OF ECONOMY
Economic factors affecting exchange rates include hedging activities,
interest rates, inflationary pressures, trade imbalance, and euro
market activities. Irving fisher, an American economist, developed a
theory relating exchange rates to interest rates. This proposition,
known as the fisher effect, states that interest rate differentials tend to
reflect exchange rate expectation.
On the other hand, the purchasing- power parity theory relates
exchange rates to inflationary pressures. In its absolute version, this
theory states that the equilibrium exchange rate equals the ratio of
domestic to foreign prices. The relative version of the theory relates
changes in the exchange rate to changes in price ratios.
POLITICAL FACTOR
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The political factor influencing exchange rates include the established
monetary policy along with government action on items such as the
money supply, inflation, taxes, and deficit financing. Active
government intervention or manipulation, such as central bank activity
in the foreign currency market, also have an impact. Other political
factors influencing exchange rates include the political stability of a
country and its relative economic exposure (the perceived need for
certain levels and types of imports). Finally, there is also the influence
of the international monetary fund.
EXPACTATION OF THE FOREIGN EXCHANGE MARKET
Psychological factors also influence exchange rates. These factors
include market anticipation, speculative pressures, and future
expectations.
A few financial experts are of the opinion that in today’s environment,
the only ‘trustworthy’ method of predicting exchange rates by gut feel.
Bob Eveling, vice president of financial markets at SG, is corporate
finance’s top foreign exchange forecaster for 1999. eveling’s gut
feeling has, defined convention, and his method proved uncannily
accurate in foreign exchange forecasting in 1998.SG ended the
corporate finance forecasting year with a 2.66% error overall, the most
accurate among 19 banks. The secret to eveling’s intuition on any
currency is keeping abreast of world events. Any event,from a
declaration of war to a fainting political leader, can take its toll on a
currency’s value. Today, instead of formal modals, most forecasters
rely on an amalgam that is part economic fundamentals, part model
and part judgment.
Fiscal policy
Interest rates
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Monetary policy
Balance of payment
Exchange control
Central bank intervention
Speculation
Technical factors
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HEDGING TOOLS
INTRODUCTION
Consider a hypothetical situation in which ABC trading co. has to
import a raw material for manufacturing goods. But this raw material is
required only after three months. However, in three months the price
of raw material may go up or go down due to foreign exchange
fluctuations and at this point of time it can not be predicted whether
the price would go up or come down. Thus he is exposed to risks with
fluctuations in forex rate. If he buys the goods in advance then he will
incur heavy interest and storage charges. However, the availability of
derivatives solves the problem of importer. He can buy currency
derivatives. Now any loss due to rise in raw material price would be
offset by profits on the futures contract and viceversa. Hence, the
derivatives are the hedging tools that are available to companies to
cover the foreign exchange exposure faced by them.
Definition of Derivatives
Derivatives are financial contracts of predetermined fixed duration,
whose values are derived from the value of an underlying primary
financial instrument, commodity or index, such as : interest rate,
exchange rates, commodities, and equities.
Derivatives are risk shifting instruments. Initially, they were used to
reduce exposure to changes in foreign exchange rates, interest rates,
or stock indexes or commonly known as risk hedging. Hedging is the
most important aspect of derivatives and also its basic economic
purpose. There has to be counter party to hedgers and they are
speculators.
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Derivatives have come into existence because of the prevalence of risk
in every business. This risk could be physical, operating, investment
and credit risk.
Derivatives provide a means of managing such a risk. The need to
manage external risk is thus one pillar of the derivative market. Parties
wishing to manage their risk are called hedgers.
The common derivative products are forwards, options, swaps and
futures.
1. Forward Contracts
Forward exchange contract is a firm and binding contract, entered into
by the bank and its customers, for purchase of specified amount of
foreign currency at an agreed rate of exchange for delivery and
payment at a future date or period agreed upon at the time of entering
into forward deal.
The bank on its part will cover itself either in the interbank market or
by matching a contract to sell with a contract to buy. The contract
between customer and bank is essentially written agreement and bank
generally stand to make a loss if the customer defaults in fulfilling his
commitment to sell foreign currency.
A foreign exchange forward contract is a contract under which the
bank agrees to sell or buy a fixed amount of currency to or from the
company on an agreed future date in exchange for a fixed amount of
another currency. No money is exchanged until the future date.
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A company will usually enter into forward contract when it knows there
will be a need to buy or sell for an currency on a certain date in the
future. It may believe that today’s forward rate will prove to be more
favourable than the spot rate prevailing on that future date.
Alternatively, the company may just want to eliminate the uncertainity
associated with foreign exchange rate movements.
The forward contract commits both parties to carrying out the
exchange of currencies at the agreed rate, irrespective of whatever
happens to the exchange rate.
The rate quoted for a forward contract is not an estimate of what the
exchange rate will be on the agreed future date. It reflects the interest
rate differential between the two currencies involved. The forward rate
may be higher or lower than the market exchange rate on the day the
contract is entered into.
Forward rate has two components.
Spot rate
Forward points
Forward points, also called as forward differentials, reflects the
interest differential between the pair of currencies provided capital
flow are freely allowed. This is not true in case of US $ / rupee rate as
there is exchange control regulations prohibiting free movement of
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capital from / into India. In case of US $ / rupee it is pure demand and
supply which determines forward differential.
Forward rates are quoted by indicating spot rate and premium /
discount.
In direct rate,
Forward rate = spot rate + premium / - discount.
Example:
The inter bank rate for 31st March is 44.60
Premium for forwards are as follows.
Month Paise
April 40/42
May 65/67
June 87/88
If a one month forward is taken then the forward rate would be
44.60 + .42 = 49.12
If a two months forward is taken then the forward rate would be
44.60. + .67 = 49.37.
If a three month forward is taken then the forward rate would be
44.60 + .88 = 49.58.
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Example:
Let’s take the same example for a broken date Forward
Contract Spot rate = 48.70 for 31st March.
Premium for forwards are as follows
30th April 48.70 + 0.42
31st May 48.70 + 0.67
30th June 48.87 + 0.88
For 17th May the premium would be (0.67 – 0.42) * 17/31 = 0.137
Therefore the premium up to 17th May would be 48.70 + 0.807 =
49.507.
Premium when a currency is costlier in future (forward) as compared
to spot, the currency is said to be at premium vis-à-vis another
currency.
Discount when a currency is cheaper in future (forward) as compared
to spot, the currency is said to be at discount vis-à-vis another
currency.
Example:
A company needs DEM 235000 in six months’ time.
Market parameters :
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Spot rate IEP/DEM – 2.3500
Six months Forward Rate IEP/DEM –2.3300
Solutions available:
The company can do nothing and hope that the rate in six
months time will be more favorable than the current six months
rate. This would be a successful strategy if in six months time
the rate is higher than 2.33. However, if in six months time the
rate is lower than 2.33, the company will have to loose money.
It can avoid the risk of rates being lower in the future by
entering into a forward contract now to buy DEM 235000 for
delivery in six months time at an IEP/DEM rate of 2.33.
It can decide on some combinations of the above.
Various options available in forward contracts:
A forward contract once booked can be cancelled, rolled over,
extended and even early delivery can be made.
Roll over forward contracts
Rollover forward contracts are one where forward exchange contract is
initially booked for the total amount of loan etc. to be re-paid. As and
when installment falls due, the same is paid by the customer at the
exchange rate fixed in forward exchange contract. The balance
amount of the contract rolled over till the date for the next installment.
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The process of extension continues till the loan amount has been re-
paid. But the extension is available subject to the cost being paid by
the customer. Thus, under the mechanism of roll over contracts, the
exchange rate protection is provided for the entire period of the
contract and the customer has to bear the roll over charges. The cost
of extension (rollover) is dependent upon the forward differentials
prevailing on the date of extension. Thus, the customer effectively
protects himself against the adverse spot exchange rates but he takes
a risk on the forward differentials. (i.e. premium/discount). Although
spot exchange rates and forward differentials are prone to fluctuations,
yet the spot exchange rates being more volatile the customer gets the
protection against the adverse movements of the exchange rates.
A corporate can book with the Authorised Dealer a forward cover on
roll-over basis as necessitated by the maturity dates of the underlying
transactions, market conditions and the need to reduce the cost to the
customer.
Example:
An importer has entered into a 3 months forward contract in the month
of February.
Spot Rate = 48.65
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Forward premium for 3 months (May) = 0.75
Therefore rate for the contract = 48.65 + 0.75 = 49.45
Suppose, in the month of May the importer realizes that he will not be
able to make the payment in May, and he can make payment only in
July. Now as per the guidelines of RBI and FEDAI he can cancel the
contract, but he cannot re-book the contract. So for this the importer
will go for a roll-over forward for May over July.
The premium for May is 0.75 (sell) and the premium for July is 0.95
(buy).
Therefore the additional cost i.e. (0.95 – 0.75) = 0.25 will have to be
paid to the bank.
The bank then fixes a notional rate. Let’s say it is 48.66.
Therefore in May he will sell 48.66 + 0.75 = 49.41
And in July he will buy 48.66 + 119.75 = 49.85
Therefore the additional cost (49.85 – 49.41) = 0.4475 will have to be
paid to the Bank by the importer.
Cancellation of Forward Contract
A corporate can freely cancel a forward contract booked if desired by
it. It can again cover the exposure with the same or other Authorised
Dealer. However contracts relating to non-trade transaction\imports
with one leg in Indian rupees once cancelled could not be rebooked till
now. This regulation was imposed to stem bolatility in the foreign
exchange market, which was driving down the
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rupee.
Thus the whole objective behind this was to stall speculation in the
currency.
But now the RBI has lifted the 4-year-old ban on companies re-booking
the forward transactions for imports and non-traded transactions. It
has been decided to extend the freedom of re-booking the import
forward contract up to 100% of un-hedged exposures
Falling due within one year, subject to a cap of $ 100 Mio in a financial
year per corporate.
The removal of this ban would give freedom to corporate Treasurers
who sould be in apposition to reduce their foreign exchange risks by
canceling their existing forweard transactions and re-booking them at
better rates. Thus this in not liberalization, but it is restoration of the
status quo ante.
Also the Details of cancelled forward contracts are no more required to
be reported to the RBI.
The following are the guidelines that have to be followee in case of
cancellation of a forward contract.
1.) In case of cancellation of a contract by the client (the request
should be made on or before the maturity date) the Authorised Dealer
shall recover/pay the, as the case may be, the difference between the
contracted rate and the rate at which the cancellation is effected. The
recovery/payment of exchange difference on canceling the contract
may be up front or back – ended in the discretion of banks.
2.) Rate at which the cancellation is to be effected :
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Purchase contracts shall be cancelled at the contracting
Authorised Dealers spot T.T. selling rate current on the date of
cancellation.
Sale contract shall be cancelled at the contracting Authorised
Dealers spot T.T. selling rate current on the date of cancellation.
Where the contract is cancelled before maturity, the appropriate
forward T.T. rate shall be applied.
3.) Exchange difference not exceeding Rs. 100 is being ignored by
the contracting Bank.
4.) In the absence of any instructions from the client, the contracts,
which have matured, shall be automatically cancelled on 15 th day falls
on a Saturday or holiday, the contract shall be cancelled on the next
succeeding working day.
In case of cancellation of the contract
1.) Swap, cost if any shall be paid by the client under advice to him.
2.) When the contract is cancelled after the due date, the client is
not entitled to the exchange difference, if any in his favor, since the
contract is cancelled on account of his default. He shall however, be
liable to pay the exchange difference, against him.
Early Delivery
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Suppose an Exporter receives an Export order worth USD 500000 on
30/06/2000 and expects shipment of goods to take place on
30/09/2000. On 30/06/200 he sells USD 500000 value 30/09/2000 to
cover his FX exposure.
Due to certain developments, internal or external, the exporter now is
in a position to ship the goods on 30/08/2000. He agrees this change
with his foreign importer and documents it. The problem arises with
the Bank as the exporter has already obtained cover for 30/09/2000.
He now has to amend the contract with the bank, whereby he would
give early delivery of USD 500000 to the bank for value 30/08/2000.
i.e. the new date of shipment.
However, when he sold USD value 30/09/2000, the bank did the same
in the market, to cover its own risk. But because of early delivery by
the customer, the bank is left with a “ long mismatch of funds
30/08/2000 against 30/09/2000, i.e. + USD 500000 value 30/08/2000
(customer deal amended) against the deal the bank did in the inter
bank market to cover its original risk USD value 30/09/2000 to cover
this mismatch the bank would make use of an FX swap.
The swap will be
1.) Sell USD 500000 value 30/08/2000.
2.) Buy USD 500000 value 30/09/2000
The opposite would be true in case of an importer receiving documents
earlier than the original due date. If originally the importer had bought
USD value 30/09/2000 on opening of the L/C and now expects receipt
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of documents on 30/08/2000, the importer would need to take early
delivery of USD from the bank. The Bank is left with a “ short mismatch
“ of funds 30/08/2000 against 30/09/2000. i.e. USD 500000 value
(customer deal amended) against the deal the bank did in the inter
bank market to cover its original risk + USD 500000
To cover this mismatch the vank would make use of an FX swap, which
will be ;
1. Buy USD value 30/08/2000.
2. Sell USD value 30/09/2000.
The swap necessitated because of early delivery may have a swap cost
or a swap difference that will have to be charged / paid by the
customer. The decision of early delivery should be taken as soon as it
becomes known, failing which an FX risk is created. This means that
the resultant swap can be spot versus forward (where early delivery
cover is left till the very end) or forward versus forward. There is every
likelihood that the origial cover ratre will be quite different from the
maket rates when early delivery is requested. The difference in rates
will create a cash outlay for the bank. The interest cost or gain on the
cost outlay will be charged / paid to the customer.
Substitution of Orders
The substitution of forward contracts is allowed. In case shipment
under a particular import or export order in respect of which forward
cover has been booked does not take place.
The corporate can be permitted to substitute another order under the
same forward contract, provided that the proof of the genuineness of
the transaction is given.
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Advantages of using forward contracts:
They are useful for budgeting, as the rate at which the company
will buy or sell is fixed in advance.
There is no up-front premium to pay whn using forward
contracts.
The contract can be drawn up so that the exchange takes place
on any agreed working day.
Disadvantages of forward contracts:
They are legally binding agreements that must be honoured
regardless of the exchange rate prevailing on the actual forward
contract date.
They may not be suitable where there is uncertainty about future
cash flows. For example, if a company tenders for a contract and
the tender is unsuccessful, all obligations under the Forward
Contract must still be honoured.
2. OPTIONS
An option is a Contractual agreement that gives the option buyer the
right, but not the obligation, to purchase (in the case of a call option)
or to sell (in the case of put option) a specified instrument at a
specified price at any time of the option buyer’s choosing by or before
a fixed date in the future. Upon exercise of the right by the option
holder, and option seller is obliged to deliver the specified instrument
at a specified price.
The option is sold by the seller (writer)
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To the buyer (holder)
In return for a payment (premium)
Option lasts for a certain period of time – the right expires at its
maturity
Options are of two kinds
1.) Put Options
2.) Call Options
PUT OPTIONS
The buyer (holder) has the right, but not an obligation, to sell the
underlying asset to the seller (writer) of the option.
CALL OPTIONS
The buyer (holder) has the right, but not the obligation to buy
the underlying asset from the seller (writer) of the option.
STRIKE PRICE
Strike price is the price at which calls & puts are to be exercised (or
walked away from)
AMERICAN & EUROPEAN OPTIONS
American Options
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The buyer has the right (but no obligation) to exercise the option at
any time between purchase of the option and its maturity.
European Options
The buyer has the right (but no obligations) to exercise the option at
maturity only.
UNDERLYING ASSETS :
Physical commodities, agriculture products like wheat, plus
metal, oil.
Currencies.
Stock (Equities)
INTRINSIC VALUE:
It is the value or the amount by which the contract is in the option.
When the strike price is better than the spot price from the buyers’
perspective.
Example:
If the strike price is USD 5 and the spot price is USD 4 then the buyer
of put option has intrinsic value. By the exercising the option, the
buyer of the option, can sell the underlying asset at USD 5 whereas in
the spot market the same can be sold for USD 4.
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The buyer’s intrinsic value is USD 1 for every unit for which he has a
right to sell under the option contract.
IN, OUT, AT THE MONEY:
In-the-money:
An option whose strike price is more favorable than the current market
exchange rate is said to be in the money option. Immediate exercise of
such option results in an exchange profit.
Example:
If the US $ call price is (put) £1 = (call) US $ 1.5000 and the market
price is £1 = US $ 1.4000, the exercise of the option by purchaser of
US $ call will result in profit of US $ 0.1000 per pound. Such types of
option contract is offered at a higher price or premium.
Out-of-the-money:
If the strike price of the option contract is less favorable than the
current market exchange rate, the option contract is said to be out-of-
the-money to its market price.
At-the-money:
If the market exchange rate and strike prices are identical then the
option is called to be at-the-money option. In the above example, if the
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market price is £1 = US $ 1.5000, the option contract is said to be at
the money to its market place.
Summary
Prices Calls Puts
Spot>Strike in-the-money out-of-the-money
Spot=Strike at-the-money at-the-money
Spot<Strike out-of-the-money in-the-money
Naked Options:
A naked option is where the option position stands alone, it is not used
in the conjunction with cash marked position in the underlying asset,
or another potion position.
Pay-off for a naked long call:
A long call, i.e. the purchaser of a call (option), is an option to buy the
underlying asset at the strike price. This is a strategy to take
advantage of any increase in the price of the underlying asset.
Example:
Current spot price of the underlying asset : 100
Strike price : 100
Premium paid by the buyer of the call : 5
(Scenario-1)
If the spot price at maturity is below the strike price, the option will not
be exercised (since buying in the spot is more advantageous). Buyer
will lose the premium paid.
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(Scenario-2)
If the spot price is equal to strike price (on maturity), there is no
reason to exercise the option. Buyer loses the premium paid.
(Scenario-3)
If the spot price is higher than the strike price at the time of maturity,
the buyer stands to gain in exercising the option. The buyer can buy
the underlying asset at strike price and sell the same at current market
price thereby make profit.
However, it may be noted that if on maturity the spot price is less than
the INR 43.52 (inclusive of the premium) the buyer will stand to loose.
CURRENCY OPTIONS
A currency option is a contract that gives the holder the right (but not
the obligation) to buy or sell a fixed amount of a currency at a given
rate on or before a certain date. The agreed exchange rate is known as
the strike rate or exercise rate.
An option is usually purchased for an up front payment known as a
premium. The option then gives the company the flexibility to buy or
sell at the rate agreed in the contract, or to buy or sell at market rates
if they are more favorable, i.e. not to exercise the option.
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How are Currency Options are different from Forward Contracts?
A Forward Contract is a legal commitment to buy or sell a fixed
amount of a currency at a fixed rate on a given future date.
A Currency Option, on the other hand, offers protection against
unfavorable changes in exchange raters without sacrificing the
chance of benefiting from more favorable rates.
Types of Options :
A Call Option is an option to buy a fixed amount of currency.
A Put Option is an option to sell a fixed amount of currency.
Both types of options are available in two styles :
1. The American style option is an option that can be exercised
at any time before its expiry date.
2. The European style option is an option that can only be exercised at
the specific expiry date of the option.
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Option premiums :
By buying an option, a company acquires greater flexibility and
at the same time receives protection against unfavorable
changes in exchange rates. The protection is paid for in the
form of a premium.
Example:
A company has a requirement to buy USD 1000000 in one
months time.
Market parameters:
Current Spot Rate is 1,600 one month forward rate is 1.6000
Solutions available:
Do nothing and buy at the rate on offer in one months time. The
company will gain if the dollar weakens (say 1.6200) but will lose
if it strengthens (say 1.5800).
Enter into a forward contract and buy at a rate of 1.6000 for
exercise in one month’s time. In company wil gain if the dollar
strengthens, but will lose if it weakens.
But a call option with a strike rate of 1.6000 for exercise in one
month’s time. In this case the company can buy in one months
time at whichever rate is more attractive. It is protected if the
dollar strengthens and still has the chance to benefit if it
weakens.
How does the option work?
The company buys the option to buy USD 1000000 at a rate of 1.6000
on a date one month in the future (European Style). In this example,
let’s assume that the option premium quoted is 0.98 % of the USD
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amount (in this case USD 1000000). This cost amounts to USD 9800 or
IEP 6125.
Outcomes:
If, in one months time, the exchange rate is 1.5000, the cost of
buying USD 1000000 is IEP 666,667. However, the company
can exercise its Call Option and buy USD 1000000 at 1.6000.
So, the company will only have to pay IEP 625000 to buy the
USD 1000000 and saves IEP 41667 over the cost of buying
dollars at the prevailing rate. Taking the cost of the potion
premium into account, the overall net saving for the company
is IEP 35542.
On the other hand, if the exchange rate in one month time is
1.7000. The company can choose not to exercise the Call
Option and can buy USD 1000000 at the prevailing rate of
1.7000. The company pays IEP 588235 for USD 1000000 and
saves IEP 36765 over the cost of forward cover at 1.6000. The
company has a net saving of IEP 30640 after taking the cost of
the option premium into account.
In a world of changing and unpredictable exchange rates, the payment
of a premium can be justified by the flexibility that options provide.
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MAKING THE MOST OF OPTIONS
Options are particularly flexible:
The buyer can choose any strike rate and any end date. The
management of an option position can be made even more flexible
with the following techniques :
Selling back an option
The bank will at any time quote a price at which it is prepared to buy
back an option it has sold. The valued of the option can be paid
directly to the holder or can be incorporated in the rate on any new
spot or forward deals done at the time.
Extending or shortening an option
The expiry date on an option can be changed, usually with payment of
premium, either by the company to the bank (for an extension) or by
the bank to the company (for shortening). A payment of premium can
be avoided by adjusting the strike rate when the expiry date is altered.
Changing other features of an option
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In principle, any feature of an option may be changed at any tiem
(strike rate, option amount), with a resulting payment of premium in
one direction or the other.
Uses of Options
On account of market volatility, if one is not very sure of the
rates, option contract is useful to limit losses and gives access to
unlimited profit potential.
In calm markets, writing of options is a profitable business with
relatively low risk.
Options contracts are ideal when tendering for a business
contract where the outcome is uncertain.
Options are useful in carrying out ongoing transactions where
exposures are uncertain in terms of timings amounts etc.
Option provides the best tool to hedge balance sheet translation
exposure.
Options are useful for hedging foreign currency loan exposures.
OPTIONS- Indian Scene
In the past, Indian market other than currency market has
experienced derivative instruments in the form of futures, etc. The
process of globalisation and integration of Indian Financial sector
with the global economy has opened up vast potential of the world
currency markets in the business, expecially the matured, highly
liquid and competitive markets of currency options. The successful
management of stability of rupee exchange rate against the US
dollar dampened the sentiments of volatility of $/rupee rate.
Stability of exchange rate stimulates growth of international trade in
good/services, investment flows etc. The volatility and vulnerability
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of rupee against the currencies other than the US dollar is beyond
management in terms of exchange rate stability of rupee.
Considering this aspect and also the maturity of the world currency
options market, the RBI introduced the cross currency options with
effect from January 1994 in terms of its AD.
The main features are:
At present Indian residents can buy cross currency options
only to hedge their foreign exchange exposures in non-US
dollar currencies.
Corporate can buy but cannot write options.
Due to certain structural deficiencies of the Financial markets in India;
the RBI has not permitted rupee-based currency options. Options are
allowed to be bought by clients only to cover their genuine exposures.
Banks selling currency options have to hedge themselves immediately
on back-to-back basis. The managing committee of FEDAI adopted,
with certain modifications, “International Currency Options
Master”(ICOM) agreement of British Bankers Association, London for
cross currency options market in India.
The cross currency options market is still in an infancy stage in India
and the initial euphoria over cross currency subsided on account of the
following factors.
The RBI introduced cross currency options in non US dollar
currencies for covering genuine exposures of the corporate.
Nearly 60 to 70% of the corporate exposures are denominated in
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the US dollar. As a result major of the corporate exposures did
not require currency options as a hedging tool.
Reluctance of the corporates to part with the front-end fee as the
price for purchase of an option contract.
The premium or price of the currency option contract is higher
than the expectation of the corporates about the volatility of
currency movements.
Rigidities attached to the cross currency option contract deals.
Absence of long term rupee yield curve, structural deficiencies of
the financial market.
The most important problem is the absence of rupee based
currency options.
The above factors have certainly shunted the growth of cross currency
options as a first derivative product on the Indian Foreign Exchange
market.
Earlier Indian corporate clients had only two options to manage foreign
exchange risk.
To do nothing till the maturity of the transactions of
To book a forward contract and settle the transaction at
contracted date of maturity of the contract.
However, today corporate have additional tool at their disposal in the
form of cross currency option for managing their currency exposures.
Introduction of cross currency options is a certain raiser and its
subsequent development application in the currency market will bring
in onslaught of complex derivative products for both the corporates as
well as the bankers.
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Example:
Suppose French company expects to pay against it imports, USD
10,000,000 in six months time. They expect US $ to fall but do not
want to take the chance of being wrong.
Current market rates
Spot USD/FRF 6.9150
6 months USD/FRF 6.9450
A 6 month “at the money” USD call/FRF put option contract costs 1 %
The strike price would therefore be 6.9450
Option Premium is 10,000,000 * 1 % = FRF 691,500
The choices that the company has are :
Do nothing (aggressive).
Buy USD/sell FRF Forward (defensive) @ 6.9450
Hedge is means of the option (selective) USD Put/CHF call costs
1 %
In six months time
Case I: Spot USD/FRF = 7.0550
Choice 1
Where the company did nothing tthey buy USD from the market and
pay USD 10,000,000 * 7.0550 = FRF 70,550,000.
Choice 2
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Where the company bought forward they pay 10,000,000 * 6.9450
= FRF 69,450,000.
Choice 3
Where the company hedged the option they exercise the option to buy
USD and pay FRF 69,450,000 plus Option Premium FRF 691,500.
Case II: Spot USD/FRF = 6.9450
Choice 1
Where the company did nothing they buy USD from the market and
pay 10,000,000 * 6.9450 = FRF 69,450,000.
Choice 2
Where the company bought forward USD they pay 10,000,000 *
6.9450 = FRF 69,45,000.
Choice 3
Where the company hedge with option, whether the exercise the
option or not they pay FRF 69,450,000 + the option premium = FRF
70,141,500.
Case III: Spot USD/FRF = 6.8500
Choice 1
Where the company bought forward USD from the market and pay
10,000,000 * 6.8500 = FRF 68,500,000.
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Choice 2
Where the company bought forward USD they pay 10,000,000 *
6.9450 = FRF 69,45,000.
Choice 3
Where the company hedge with option, they don’t exercise the option
but buy USD from the market and pay FRF 68,500,00 + the option
premium = FRF 69,191,500.
Choice Case 1
USD/
FRF7.0550
Case 2
USD/FRF 6.9450
Case 3
USD/FRF
6.8500
1. Nothing 70,550,000 69,450,000 68,500,000
2.
Forward
69,450,000 64,450,000 69,450,000
3. Option 70,141,500 70,141,000 69,191,500
Choice 2 is best Choices 1 & 2 are
best
Choice 1 is best
Thus the general rule for hedging exposures with options is that with
hindsigtht one can deduce that there was always a better strategy. The
question to be asked is what the risk is and does the option premium
justify it ? Beside, always look at an option as an insurance policy, it
never qualifies as a good investment but always provides protection
against the unknown.
3. SWAPS
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WHY DID SWAPS EMERGE?
In the late 1970’s, the first currency swap was engineered to
circumvent the currency control imposed in the UK. A tax was levied
on overseas investments to discourage capital outflows. Therefore, a
British company could not transfer funds overseas in order to expand
its foreign operations without paying sizeable penalty. Moreover, this
British company had to take an additional currency risks arising from
servicing a sterling debt with foreign currency cash flows. To overcome
such a predicament, back-to-back loans were used to exchange debts
in different currencies. For example, a British company wanting to
raise capital in the Frace would raise the capital in the UK and
exchange its obligations with a French company, which was in a
reciprocal position. Though this type of arrangement was providing
relief from existing protections, one could imagine, the task of locating
companies with matching needs was quite difficult in as much as the
cost of such transactions was high. In addition, back-to-back loans
required drafting multiple loan agreements to strate respective loan
obligations with clarity. However this type of arrangement leads to
development of more sophisticated swap market of today.
WHAT ARE SWAPS?
A contract between two parties, referred to as counter parties, to
exchange two streams of payments for agreed period of time. The
payments, commonly called legs or sides, are calculated based on the
underlying notional using applicable rates. Swaps contracts also
include other provisional specified by the counter parties. Swaps are
not debt instrument to raise capital, but a tool used for financial
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management. Swaps are arranged in many different currencies and
different periods of time. US $ swaps are most common followed by
Japanese yen, sterling and Deutsche marks. The length of past swaps
transacted has ranged from 2 to 25 years.
PRESENT SCENARIO IN THE INDIAN MARKET
Genesis of the Interest Rate Swaps in India
Interest rates in India have been RBI determined for decades now. In
the past five years, we have seen this situation changing. Gradually,
India is moving towards a market determined interest rate regime. RBI
is gradually freeing interest rates, and this has forced banks to manage
risks on their own. Moreover, the Indian companies were used to the
earlier easy go approach and surety in interest rates that they can
borrow on. But now, corporate have a plethora of rates at which they
can borrow. They have the option of loans linked to fixed or floating
rates. Thus, Indian companies have to be se efficient with regards to
management fo financial uncertainities, like s are elsewhere in the
world. With all this deregulation and integration with global practices,
there was a felt needs for Instruments to hedge against various risks.
Derivatives for the money market were the next logical step in the
process. This is exactly what RBI has done.
The RBI Governor’s Statement on ‘Mid Term Review of Monetary and
Credit Policy for 1998-99 announced on October 30, 1998, indicated
that to further deepening the money market and to enable banks,
primary dealers (PDs) and all India financial instituti9ons (FIs) to hedge
interest risks, the RBI had decided to create an environment that
would favor the introduction of Interest Rate Swaps.
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Accordingly, on July 7, 1999 RBI issued final guidelines to introduce IRS
and Forward Rate Agreements (FRAs). The players are allowed to
practice IRS/FRAs as product for their own balance sheet management
and for market making purposes.
The RBI has been criticized for being hasty in introducing such interest
rate derivatives. It was said that our debt market is not mature enough
to incorporate and deal with such products. Though the Indian debt
market has not been properly developed, blaming the RBI move does
not seem to be proper because there products will have to be
introduced sooner or later and the present time appears to be as good
a time as any other. Moreover, this move may also help in quickening
the development of a mature debt and money market.
The legal framework: RBI Guidelines (summary)
A brief summary of RBI guidelines regarding IRS issued on July 7, 1999
follows :
Interest rate swap refers to a financial contract between two
parties exchanging a stream of interest payments for a notional
principal amount on multiple occasions during a specified period.
Forward rate agreement (FRA) is being defined as the same on
settlement date for a specified period from start date to maturity
date.
The players:
Scheduled commercial banks excluding regional rural banks, primary
dealers (PDs) and all India financial institutions have been allowed to
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undertake IRS as a product of their own asset liability management
and market-making purposes.
Types:
Banks/PDs/FIs undertake different types of plain vanilla FRAs/IRS for
interest rate risks arising on account of landings or borrowings made at
fixed or variable interest rates. However, swaps having explicit/implicit
option features like caps, floors or collars are not permitted.
Benchmark Rate:
The players can use any domestic money or debt market rates as
reference rate for entering into FRA/IRS, provided methodology of
computing the rate is objective, transparent and mutually acceptable
to counter parties. The reason stated for the same is that the
benchmark rate is expected to evolve on its own in the market.
Size of the notional principal amount :
There will be no limit on the maximum or minimum size of the notional
principal amount of FRA/IRS or the tenor of the IRS/FRAs. Regarding
the exposure limits the banks; FIs and PDs have to arrive at the credit
equivalent amount for the purpose of reckoning exposure to counter
party.
Exposure:
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The exposure should be within the sublimits and the participants
concerned should fix this for the FRAs/IRS to corporate/FIs, banks/PDs.
In case of the banks and the FIs, the credit exposure should be within
the single/group borrower limits as prescribed by the RBI.
Facilitators
The problem of locating potential counter parties was solved through
dealers and brokers. A swap dealer takes on one side of the
transaction as counter party. Dealers work for investment, commercial
or merchant banks. “By positioning the Swap”, dealers earn bid-ask
spread for the service. In other words, the swap dealer earns the
difference between the amount received from a party and the amount
paid to the other party. In an ideal situation, the dealer would offset his
risks by matching one step with another to streamline his payments. If
the dealer were a counter party paying fixed rate payments and
receiving floating rate payments, he would prefer to be a counter party
receiving fixed payments and paying floating rate payments in another
swap. A perfectly netted position as just described is not necessary.
Dealers have the flexibility to cover their exposure by matching
multiple parties and by using other tools such as fitires to cover an
exposed position until the book is complete.
Swap Market Participations
Since swaps are privately negotiated products, there is no restriction
on who can use the market : however, parties with low credit quality
have difficulty entering the market. This is due to fact that they cannot
be matched with counter parties who are willing to take on their risks.
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In the U.S. many parties require their counter parties to have minimum
assets of $ 10 million. This requirement has become a standardized
representation of “ eligible swap participants “.
The following list includes a Sample of Swaps Market Participants :
1. Multinational Companies.
Shell, IBM, Ronda, Unilever, Procter & Gamble, Pepsi Co.
2. Banks
Banks participate in the swap market either as an intermediary for two
or more parties or as counter party for their own financial
management.
3. Sovereign and public sector institutions
Japan, Republic of Italy, Electricity de France, Sallie Mae (U.S. Student
Loan Marketing Association).
4. Super nationals
World Bank, European Investment Bank, Asian Development Bank.
5. Money Managers
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Insurance companies, Pension funds.
Secondary Factors in the Development of the Swap
Market
As international barriers to financial markets began to disappear, swap
dealers were able to switch between different indexes and different
markets. By arbitraging capital and credit markets, they were able to
borrow at the best index available and then swap to the desired index.
Heavy borrowing by the US government and government agencies in
the ‘80s played a major role in the development of the swap market.
Borrowing at the floating rates and swapping to the fixed rates met the
needs of the corporations and in effect added to the depth and the
liquidity of the swap market.
Taking a view on the future direction of the interest rates, swaps can
be proved to very attractive instruments, and under a variety of yield
curve conditions, they are among the cheapest to transact. Speculative
trading of the swaps added enormously to the depth and liquidity of
the market.
Foreign Exchange Swap
Swaps are derivatives that involve a private agreement between two
parties to exchange cash flows in the future according to a
prearranged formula. The underlying instruments are liabilities or
assets with interest expenses or incomes. Swaps can be broadly
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classified into two types – Interest Rate Swaps and Currency Swaps.
The first recorded swaps were negotiated in 1981. Since then, the
markets have grown very rapidly.
A basic foreign exchange swap is the simultaneous purchase and sale
of one currency for another, where the two contracts have different
dates (different positions of same or different amount on different
dates).
Cash Management Swap
It is used to realize efficient cash management or to adjust the
maturity dates of existing forward contracts.
Handling Surplus and Deficit Cash Positions
The international scope of business conducted by financial and non-
financial organization will often require the management of cash flows
in more than one currency. From time to time, an entity will find itself
with surplus cash balance in one currency and deficit balances in
another currency.
Swapping Forward Contracts Forward at Historical Rates.
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Corporations often face considerable uncertainty in timing and /of
amount when forecasting currency cash flows. Forward contracts that
were dealt to hedge such flows may mature on a date that does not
match the actual cash flow. In such cases, the maturity of the original
forward contract crates cash flows for which there is no immediate
offset.
Once again, the cash manager can borrow to fund the deficit, invest
the surplus, or execute a cash management swap. Another method to
deal with this type of situation is to swap contracts at historical rates.
The new forward contract consists of the maturing forward rate
adjusted by the current points and a working capital interest factor.
Historical rate rollovers have the same basic economic as market rate
saps. The also eliminate the need for any cash settlements on the
original maturity date and avoid the accounting problems frequently
associated with the FX gain/loss account. On small forward contractrs,
the actual dollar amount of the net settlement ma be small, and cost of
settling may be excessive given the amount involved. In other cases,
an entity may not have the cash to settle on the swap but still want the
swap done.
As a general comment, usage of historical rate swaps varies from
market to market, but this type of swap is not a heavily traded
transaction. One of the major reasons is its susceptibility to abuse.
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There are basically two types of swap transactions :
Interest Rate Swap
Currency Swap
1. INTEREST RATE SWAPS
The most common type of interest rate swaps are “plain vanilla” IRS.
Here, one party A, agrees to pay to the other party B, cash flows equal
to interest at a predetermined fixed rate on a notional principal for a
number ofyears. Simultaneously, A agrees to pay party B cash flows
equal to interest at a floating rate on the same notional principal for
the same period of time. The currencies of the two sets of interest cash
flows are the same. Moreover, only the difference in the interest
payments is paid/received; the principal is used only to calculate the
interest amounts and is never exchanged.
It is an arrangement whereby one party exchanges one set of interest
payment for another e.g. fixed or floating.
An exchange between two parties of interest obligations (payment of
interest) in the same currency on an agreed amount of notional
principal for an agreed period of time.
Example :
Two counter parties are involved in a swap agreement, corporate A
and corporate B and a dealer arranges the swap (taking a spread).
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Amount to be borrowed : USD 100 Mn. For 15 years.
Following are the rates at which A and B can raise funds :
Fixed Floating
Corporate A 5 % 6M LIBOR + 50bp
Corporate B 7 % 6M LIBOR + 100bp
It can be observed that Corporate A has advantage in borrowing in
both fixed and floating market. (Fixed market 2 % and Floating market
50bp).
However, by swapping interest rate obligation both A and B can borrow
at lower rates.
Corporate A borrows fixed @ 5 %
Corporate B borrows floating @ 6 month LIBOR + 100bp.
By entering into a swap agreement : A will become floating ratepayer;
and B will become fixed rate player.
Cash flow under the swap agreement;
Corporate A
PAY RECEIVE
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6 M LIBOR* 5 %
5 % & -----
Net cost: 6 M LIBOR (Pay 5 % cancels Receive 5 %)
Corporate B
PAY RECEIVE
5.5 %* 6 M LIBOR *
6 M LIBOR + 100bp & -----
Net Cost : 6.5 %
PAY/RECEIVE TO/FROM DEALER & PAY TO THE LENDER IN CASH
MARKET
NOTE:
1. Corporate have to borrow in cash market and meet their
obligations.
2. It is assumed that the dealer takes a spread of 50bp.
Corporate A achieves floating rate at 6 M LIBOR better by
50bp than without swap.
Corporate B achieves fixed rate at 6.5 % better by 50bp
than without swap.
Dealer makes 50bp.
Types of IRS
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We have discussed the plain vanilla swaps till now. These swaps can
be subdivided into swaps made directly between two parties or with an
exchange. Moreover, they can be classified on the basis of the floating
reference rate used, which may be LIBOR, CP rate, T-Bill rate, etc.
Apart from “plain vanilla” IRS discussed above, there are several other
types of swaps.
Basis Swaps:
Where both the legs are floating interest rates.
Amortizing Swaps:
Where the principal reduces in a predetermined way to correspond to
the amortization schedule on a loan.
Step-up Swaps:
Where principal increases in a predetermined way
Deferred/Forward Swaps:
Where parties do not begin to exchange interest payments until some
future date.
Combinations with currency Swaps:
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where fixed rate in one currency is exchanged with floating rate in
another currency.
Extendable Swaps:
Where one party has the option to extend the life of the swap beyond
the specified period.
Put table Swaps:
where one party has the option to terminate the swap early.
Swaptions :
which is options on swaps.
Constant Maturity Swaps (CMSs):
Where LIBOR is used as reference rate.
Constant Maturity Treasury Swaps (CMTs):
Where LIBOR is exchanged for a particular Treasury rate.
Indexed principal Swaps:
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Where the principal reduces based on an index of interest rate levels.
Differential Swaps:
Where a floating rate in domestic currency is exchanged for a floating
rate in foreign currency, with both interest rates applied on same
domestic principal.
Back valued Swaps:
Where past effective dates are used.
Prepaid Swaps:
where the fixed leg payer pays his obligations in advance, and only
receives payments till maturity, zero coupon swaps are exactly
opposite to prepaid swaps, where the whole payment is given at the
maturity.
Trends in Indian Markets
Before coming to the actual trends in the market, let us look at the
players. Most of the active participation is by foreign banks, followed
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by Indian banks, Corporate and finally, FI’s. The absence of
nationalized banks from the Irs scene is noteworthy. Today, if a
corporate wishes to enter an IRS deal, it will have to submit the
following to its banker :
Certified copy of the firm’s Memorandum and Articles of
Associations.
Board resolution authorizing derivative deals.
An ISDA Master Agreement.
Risk disclosure statement.
Certificate wing underlying loan exposure.
A certificate stating that IRS is for hedging risks, not for
speculation.
Thus, we see that IRS today can be used by corporate only for an
actual hedging exercise, and it has to have board permission.
Moreover, the deal would be within the exposure limits of that firm for
the bank with which it is dealing. These measures are to ensure that
corporate do not undertake speculative activities, and start dealing
only after they have proper risk management systems in place.
On the first day of trading, more than 30 deals were recorded, worth
over Rs. 600 crores in notional principal terms. Rs. 500 crores of this
was accounted for by corporate deals. The rush was because the
European and private banks wanted to be a part of the history, dealing
on first day, rather than actual hedging. It has also been reported that
some deals were circular between three players, with no real effect in
any players’ position. No deal was stuck for more than a year’s tenor.
Since the first day, there have been almost no deals, and the markets
are cold. The reasons for this are many. At the short-term level, almost
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all the players expect the interest rates to go down in the next few
months. This means that there are no conflicting views among players
about interest rates, and so IRS deals are not very tempting. Again,
there are very few floating rate loans around. These and other
fundamental reasons have been discussed in the next secti9on.
In spite of these, there are many underlying reasons for going for IRS.
Today, the major financial intermediaries viz. Indian banks, foreign
banks, financial institutions, and corporate have radically different sets
of asset-liability structures. Thus for ALM alone, IRS are a good options.
For example, the FI’s have much of their liabilities as bullet repayment
bonds, and the bulk of their assets by way of installment repayment
loans. Thus, chances are that their liabilities portfolio is longer than
their assets portfolio. Commercial banks, on the other hand, have bulk
of their liability portfolio in relatively short-term maturities, and assets
are at longer maturities with fixed interest rates. Thus, banks and FI’s
alone can enter in a lot of mutually beneficial deals.
Corporate would also like to hedge their interest rate risks, and convert
their fixed rate loans to floating rates, now that the options are
available. However, their needs would be medium term in nature (2 to
8 years), and as yet there are no takers for this long maturities.
The market is only about 2 months old now, and is yet to evolve. The
likely problem in its evolution and the future is discussed in the
following sections.
FUTURE OUTLOOK FOR IRS IN INDIA
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As India shifts from RBI controlled to market driven interest rate
regime, volatility in the interest rate is bound to increase. This implies
greater use of risk hedging mechanism like IRS. As the obstacles
discussed in Section 5 are tackled, we shall see the evolution of the
money market derivative markets. The speed of this evolution depends
on how quickly the fundamental problems are addressed and the
market revives. The major concern, of course, will be the emergence of
a floating rate loan market, as at least one leg of the IRS has
necessarily to be a floating rate. This is the single major reason why
thee are no only many IRS deals, but also even no possibilities of deals
ill the current scenario for corporate.
Then, we have seen that the stage is set for the financial institutions,
commercial banks and corporate to enter into swaps as soon as they
have risk management systems in place and the market matures. In
the short run however, there will not be much activity as the
fundamentals are unlikely to change quickly. A major concern is the
govt. borrowing, which distorts the interest rates and has a major
impact on the market. In a mature market, no player should be so big
that it can affect the interest rates in a large way, causing rates, which
do not really reflect the sentiments of the markets. On the other hand,
this same point causes volatility in the markets, which is another
reason to hedge against risks, where IRS comes in. We wait to see how
the markets evolve.
Also likely in the medium term is the emergence of various types of
swaps not currently allowed in India. Like IRS/FRA’s kicked off the
derivative market in India, swaptions may well kick off the options
market in India, though today, it looks as though equity options will
come up earlier. As awareness increases, and it dawns on the players
that swaps are excellent hedging instruments, the market can only
improve.
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Finally, we come to speculation. This is likely to stay away from Indian
markets, at least for the corporate till a long time to come. REI, or the
govt. does not encourage speculation in any other markets by the
corporates or individuals. This is likely to continue, as
The current guidelines show. Moreover, for speculation, one needs
volatility and diverse views, which are not present today. As these
emerge, some players may be allowed to speculate, but the limits are
likely to be strict and discouraging.
Overall, IRS is here to stay, and players will soon learn to use them
effectively. Though in infancy now, the markets may evolve sooner
than one may expect.
3. CURRENCY SWAPS
Each entity has a different access and different long term needs in the
international markets. Companies receive more favorable credit ratings
in their country of domicile that in the country in which they need to
raise capital. Investors are likely to demand a lower return from a
domestic company, which they are more familiar with than from a
foreign company. In some cases a company may be unable to raise
capital in a certain currency.
Currency swaps are also used to lower than risk of currency exposure
or to change returns on investment into another, more favorable
currency. Therefore, currency swaps are used to exchange assets or
capital in one currency for another for the purpose of financial
management.
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A currency swap transaction involves an exchange of a major currency
against the U.S. dollar. In order to swap two other non-U.S. currencies,
a dealer may need to arrange two separate swaps. Although, any
currency can be used in swaps, many counter parties are unable to
exchange of the principals takes place at the commencement and the
termination of the swaps in addition to exchange of interest payments
on agreed intervals. The exchange of principal and interest is
necessary because counter parties may need to utilize the respective
exchanged currencies.
The uses of currency swaps are summarized below:
Lowering funding cost
Entering restricted capital markets
Reducing currency risk
Supply-demand imbalances in the markets
As for interest rate swaps, many variants of the plain vanilla currency
swaps were created to meet some of the common financial
management needs.
Amortizing currency swaps
The notional principals of these swaps are scheduled to decrease over
the life of the swaps. Therefore, principals are exchanged accordingly.
Accreting currency swaps
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The notional principals of these swaps increase periodically. Principals
are exchanged as scheduled.
Floating-for-floating rate currency swaps
As indicated by the name, this swap involves the exchange of a
floating interest rate payment schedule in one currency against
another floating interest rate payment schedule in another currency.
Features:
Converts a stream of payments (fixed or floating) in one currency
into a stream of another currency.
Usually involves an exchange of principal at the end of the term
at an exchange rate agreed at the outset of the deal.
Following are risks associated with swaps :
Interest rate risk
Exchange rate risk
Default risk
Sovereign risk
Mismatch risk (for dealers only)
In 1987, a set of principal were arranged by the central banking
authorities of the Group of Ten plus Luxembourg known as the Easle
Supervisor’s Committee to standardize capital requirements across
nations. According to this set of requirements, called the Easle Accord,
dealers of swaps and other off – balance sheet instruments are
imposed risk-adjusted capital requirements.
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CAPS & COLLARS
Caps are like insurance
Protect against rise in rates of interest
Benefits of falling rates available
Interest Rate Cap is agreement between a corporate and a bank
borrower with floating rate debt. Under the terms of the agreement,
the bank undertakes to bear extra cost on account of interest rate
going up beyond the agreed rate during the agreed period. For this
undertaking, the borrower pays premium.
This instrument caps the interest payment of the borrower as any rise
above the cap will be borne by the bank which sells cap to the
borrower.
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FLOORS
It is a hedging product for investors for protection against falls in
interest rates. Interest Rate floors, when it protects against fall in
interest rates, investors benefit from rising interest rates. Investor has
to pay premium to the seller of Interest rate floor.
This instrument defines the floor i.e. the minimum rate of interest the
investor would earn in case the interest rate falls beyond the agreed
limit.
COLLARS
Where a corporate takes a view that the interest rate will remain in
range, the corporate can combine cap and floor to achieve this
objective. The corporate will buy Interest Rate Collar of between 7 %
and 9 % if it believes that the interest rates would move between 7 %
and 9 %. Corporate looses the benefit if rate falls below 7 %. However,
as against this ‘loss’ the corporate pays fewer premiums and is
protected against the upside risk. (Of interest rates rising).
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4. FUTURES
In a futures contract there is an agreement to buy or sell a specified
quantity of financial instrument in a designated Future month at a
price agreed upon by the buyer and seller.
A Future contract is evolved out of a forward contract and posses
many of the same characteristics. In essence, they are like liquid
forward contracts. Unlike forward contracts however, futures contracts
trade on organized exchanges called futures markets.
The characteristics of a future contract are
Standardization
The future contracts are standardized in terms of quantity and quality
and future delivery date.
Margining
The other characteristics of a futures contract is the margining
process. The margin differs from exchange to exchange and may
change as the exchange’s perception of risk changes. This is known as
the initial margin. In addition to this there is also daily variation margin
and this process is known as marking to market.
Participants
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The majority of users are large corporations and financial institutions
either as traders or hedgers.
Futures are exchange traded
1. In futures market there is availability of clearing house for
settlement of transactions.
CURRENCY FUTURES
Currency futures markets were developed in response to the shift from
fixed to flexible exchange rates in 1971. They became particularly
popular after rates were allowed to float free in 1973, because of the
resulting increased volatility in exchange rates.
A currency future is the price of a particular currency for settlement in
a specified future date. A currency future contract is an agreement to
buy or sell, on the future exchange, a standard quantity of foreign
currency at a future date at the agreed price. The counterpart to
futures contracts is the future exchange, which ensures that all
contracts will honored. This effectively eliminates the credit risk to a
very large extent.
Currency futures are traded on futures exchanges and the most
popular exchange are the ones where the contracts are fungible or
transferable freely. The Singapore International Monetary Exchange
(SIMEX) and the International Monetary Market, Chicago (IMM) are the
most popular futures exchanges. There are smaller futures exchanges
in London, Sydney, Tokyo, Frankfurt, Paris, Brussels, Zurich, Milan, New
York and Philadelphia.
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Pricing of Futures Contract
Futures Price = Spot Price + Cost of Carrying (Interest)
Cost of carrying is the sum of all costs incurred to carry till the maturity
of the futures contract less any revenue, which may result in this
period.
In India there is no futures market available for the Indian Corporates
to hedge their currency risks through futures.
The advantages of Future Contract
Low Credit Risk : In case of futures the credit risk is low as the
clearing house is the counter party to every futures.
Gearing : Only small margin money is required to hedge large
amounts.
The disadvantages of Future Contract
Basic Risk : As futures contract are standardized they do not
provide a perfect hedge.
Margining Process : The administration is difficult.
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It is observed that a futures contract is a type of forward contract, but
there are several characteristics that distinguish from forward
contracts.
Standardized Vs. Customized Contract :
Forward contract is customized while the future is standardized.
Counter Party Risk :
In case of futures contract, once the trade is agreed upon the
exchange becomes the counter party. Thus reducing the risk to
almost nil. In case of forward contract, parties take the credit risk to
each other.
Liquidity :
Futures contract are much more liquid and their price is much more
transparent as compared to forwards.
Squaring Off:
A forward contract can be reversed only with the same counter
party with whom it was entered into. A futures contract can be
reversed with any member of the exchange.
CONTRIBUTION OF DERIVATIVES IN THE GROWTH OF FOREX MARKETS.
The tremendous growth of the financial derivatives market and reports
of major losses associated with derivative products have resulted in a
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great deal of confusion about these complex instruments. Are
derivatives a cancerous growth that is slowly but surely destroying
global financial markets ? Are people who use derivative products
irresponsible because they use financial derivatives as part of their
overall risk management strategy ?
Thos who oppose financial derivatives fear a financial disaster of
tremendous proportions a disaster that could paralyze the world’s
financial markets and force governments to intervene to restore
stability and prevent massive economic collapse, all at taxpayers’
expense. Critics believe that derivatives create risks that are
uncontrollable and not well understood.
People have certain believes about derivatives which hampers the
growth of the derivatives market. They are :
Derivatives are new, complex, high-tech financial products.
Derivatives are purely speculative, highly leveraged
instruments.
The enormous size of the financial derivatives market dwarfs
Bank Capital, Thereby Making Derivatives Trading an Unsafe
and Unsound Banking Practice.
Only large multinational corporations and large banks have a
purpose for using derivatives.
Financial derivatives are simply the latest risk management fad.
Derivatives take money out of productive processes and never
put anything back
Only risk-seeking organizations should use derivatives
The risks associated with financial derivatives are new and
unknown
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Derivatives ink market participants more tightly together,
thereby increasing systematic risks.
This is what some people believe, but it’s not the case.
Actually the financial derivatives have changed the face of finance by
creating new ways to understand, measure, and manage financial
risks. Ultimately, derivatives offer organizations the opportunity to
break financial risks into smaller components and then to buy and sell
those components to best meet specific risk-management objectives.
Moreover, under a market-oriented philosophy, derivatives allow for
the free trading of individual risk components, thereby improving
market efficiency. Using financial derivatives should be considered a
part of any business’s risk-management strategy to ensure that value-
enhancing investment opportunities can be pursued.
Thus, financial derivatives should be considered for inclusion in any
corporation’s risk-control arsenal. Derivatives allow for the efficient
transfer of financial risks and can help to ensure that value-enhancing
opportunities will not be ignored. Used properly, derivatives can
reduce risks and increase returns.
Derivatives also have a dark side. It is important that derivatives
players fully understand the complexity of financial derivatives
contracts and the accompanying risks. Users should be certain that the
proper safeguards are built into trading practices and that appropriate
incentives are in place so that corporate traders do not take
unnecessary risks.
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The use of financial derivatives should be integrated into an
organization’s overall risk-management strategy and be in harmony
with its broader corporate philosophy and objectives. There is no need
to fear financial derivatives when they are used properly and with the
firm’s corporate goals as guides.
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THEORITICAL ASPECT OF THE
STUDY
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FORECASTING EXCHANGE RATES
EFFICIENT MARKET APPROACH
Financial markets are said to be efficient if the current asset prices fully reflect all the available and relevant information. The efficient market hypothesis(EMH), which is largely attributable to Professor Eugene Fama of the University of Chicago, has strong implications for forecasting.
The exchange rate will then change only when the Market receives new information. Since news by definition is unpredictable, in the exchange rate will change randomly over time. If the exchange rate indeed follows a random walk, the future exchange rate is expected to be the same as the current exchange rate, that is,
St = E(St+1)
In a sense, the random walk hypothesis suggests that today’s exchange rate is the best predictor of tomorrow’s exchange rate.
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FUNDAMENTAL APPROACHS
The fundamental approach to exchange rate forecasting uses various models. For example, the monetary approach to exchange rate determination suggests that the exchange rate is determined by three independent variables :
1) relative money supplies2) relative velocity fo monies, and3) relative national output.
One can thus formulate the monetary approach in the following empirical form.
S = α + β1(m-m*) + β2(v-v*) + β3(y*-y) + u
Where,S = natural logarithm of the spot exchange rate.
m-m* = natural logarithm of domestic/foreign money supply. v-v* = natural logarithm of domestic/foreign velocity of money. y*-y = natural logarithm of foreign/domestic output.
U = random error term, with mean zero
α,β’s = model parameters.
Generating forecasting using the fundamental approach would involve three steps:
Step 1 = Estimation of the structural model to determine the numerical
values for the parameters such as α and β.
Step 2 = Estimation of future values of the independent variable like (m-m*), (v-v*) and (y*-y).
Step 3 = Substituting the estimated values of the independent variables into the estimated structural model to generate the exchange rate forecasts.
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TECHNICAL APPROACH
The technical approach first analyzes the past behavior of exchange rate for the purpose of identifying “patterns” and then projects them into the future to generate forecasts. Clearly, the technical approach is based on the premise that history repeats itself. The technical approach thus is at odds with the efficient market approach. At the same time, it differs from the fundamental approach in that it does not use the key economic variable such as money supplies or trade balances for the purpose of forecasting. However, technical analysts sometimes consider various transaction data like trading volume, outstanding interests, and bid-ask spreads to aid their analyses.
While academic studies tend to discredit the validity of technical analysis, many traders depend on technical analyses for their trading strategies. If a trader knows that other traders use technical analysis, it can be rational for the trader to use technical analysis too. If enough traders use technical analysis, the predictions based on it can become self-fulfilling to some extent, at least in the short run.
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Data analysis and
interpretation
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FUNDAMENTAL ANALYSIS OF INDO-US FOREIGN EXCHANGE RATE
Here we are analyzing about the Indo-US exchange rate for that the required data and in formations are as under
INDIA
(Amt. in Billion Rs.)
YEAR GNP VELOCITY
MONEY SUPPLY
1994 14008.532
321.66 4355.048
1995 15031.155
286.59 5244.862
1996 16185.772
269.14 6013.918
1997 17077.373
246.89 6916.923
1998 18177.345
224.81 8085.808
1999 19239.779
201.97 9526.208
2000 20647.907
189 10924.748
2001 22363.875
176.5 12670.767
2002 24138.275
166.01 14540.155
2003 26886.393
161.35 16663.455
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2004 30363.198
144.83 20964.760
2005 34570.318
132.83 26025.210
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UNITED STATE (US)
(Amt. in Billion Dollar)
YEAR GNP VELOCITY
MONEY SUPPLY
1994 28288.9 655.95 4312.6251995 29590.6 6549 4518.2831996 31267.3 648.4 4822.11997 33217.3 635.7 5224.7661998 34987.6 606.7 5765.9411999 370373.7 591.2 6270.3082000 39267.9 573.06 6852.2082001 40511.8 529.6 7648.4922002 41878.4 507.06 8259.0422003 43843 498.9 8787.3252004 46743.7 506.1 9234.7252005 49375.7 508.2 9786.467
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FUNDAMENTAL MODEL FOR EXCHANGE RATE
S = α + β1(m-m*) + β2(v-v*) + β3(y*-y) + u
Where,S = natural logarithm of the spot exchange rate.
m-m* = natural logarithm of domestic/foreign money supply. v-v* = natural logarithm of domestic/foreign velocity of money. y*-y = natural logarithm of foreign/domestic output.
U = random error term, with mean zero
α,β’s = model parameters.
To obtain model parameters α and β we should have S = natural logarithm of the spot exchange rate.m-m* = natural logarithm of domestic/foreign money supply.v-v* = natural logarithm of domestic/foreign velocity of money. y*-y = natural logarithm of foreign/domestic output.
YEAR S m-m* v-v* y*-y1994 -3.446 -0.0097 0.713 0.7021995 -3.476 -0.149 0.826 0.6771996 -3.570 -0.221 0.876 0.6581997 -3.594 -0.281 0.948 0.6651998 -3.722 -0.338 0.993 0.6541999 -3.764 -0.418 1.074 0.6552000 -3.804 -0.466 1.109 0.6432001 -3.855 -0.504 1.098 0.5942002 -3.884 -0.565 1.116 0.5512003 -3.834 -0.639 1.129 0.4882004 -3.812 -0.819 1.251 0.4312005 -3.784 -0.978 1.341 0.363Putting above data in model we can get followings equations
1994 – 1997
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α = -3.446 + 0.0097 β1 -0.713 β2 - 0.702 β3 -0.033 = -0.139 β1 + 0.113 β2 - 0.025 β3 -0.124 = -0.2113 β1 + 0.163 β2 - 0.044 β3
-0.148 = -0.2713 β1 + 0.235 β2 - 0.037 β3
Now, we have four equations and four unknowns. So, solving four α,β1,β2,β3.
α = -5.18 β1 = -8.54 β2 = -8.12 β3 = 10.6
1998 – 2001
α = -3.722 + 0.338 β1 -0.993 β2 - 0.654 β3 -0.042 = -0.08 β1 + 0.081 β2 - 0.001 β3 -0.085 = -0.128 β1 + 0.116 β2 - 0.011 β3
-0.133 = -0.166 β1 + 0.105 β2 - 0.06 β3
Now, we have four equations and four unknowns. So, solving four α,β1,β2,β3.
α = -3.517 β1 = -8.18 β2 = -8.65 β3 = 8.08
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2002 - 2005
α = -3.884 + 0.565 β1 -1.116 β2 - 0.551 β3 -0.05 = -0.074 β1 + 0.013 β2 - 0.063 β3 -0.072 = -0.254 β1 + 0.135 β2 - 0.120 β3
-0.133 = -0.413 β1 + 0.225 β2 - 0.188 β3
Now, we have four equations and four unknowns. So, solving four α,β1,β2,β3.
α = -4.187 β1 = -8.14 β2 = -8.13 β3 = 8.67
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Model Parameters
YEAR α β1 β2 β31994-97 -5.180 -8.54 -8.12 10.61998-01 -3.517 -8.18 -8.65 8.082002-05 -4.187 -8.14 -8.13 8.67
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COMPARISON OF INDIA’S GNP WITH EX.RATE
GNP
0
5000
10000
15000
20000
25000
30000
35000
40000
YEAR
GNP
EX. RATE
0
10
20
30
40
50
60
YEAR
EX. RATE
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RESERCH FINDINGS
&CONCLUSIONS
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CONCLUSION
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Bibliography
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BOOKS
International Financial Management- Eun / Resnick
BULLETIN
Bulletin of rbi (Reserve Bank of India)
WEBSITES
www.economagic.comwww.imf.comwww.economicsurvey.comwww.oanda.comwww.rbi.org
SEARCH ENGINE
www.google.comwww.yahoo.com
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