Module II: Global Financial Ecosystem Worlds major Financial Markets for Equity World-Stock-Exchanges.

net features a list of world stock exchanges, securities commissions and other regulatory agencies, as well as stock market resources. Top 5 Stock Exchanges New York Stock Exchange (NYSE) - Headquartered in New York City. Market Capitalization (2011, USD Billions) 14,242; Trade Value (2011, USD Billions) 20,161. The largest stock exchange in the world by both market capitalization and trade value. NYSE is the premier listing venue for the worlds leading large- and medium-sized companies. Operated by NYSE Euronext, the holding company created by the combination of NYSE Group, Inc. and Euronext N.V., NYSE offers a broad and growin array of financial products and services in cash equities, futures, options, exchange-traded products (ETPs), bonds, market data, and commercial technology solutions. Featuring more than 8000 listed issues it includes 90% of the Dow Jones Industrial Average and 82% of the S&P 500 stock market indexes volume. NASDAQ OMX - Headquartered in New York City. Market Capitalization (2011, USD Billions) - 4,687; Trade Value (2011, USD Billions) 13,552. Second largest stock exchange in the world by market capitalization and trade value. The exchange is owned by NASDAQ OMX Group which also owns and operates 24 markets, 3 clearinghouses and 5 central securities depositories supporting equities, options, fixed invome, derivatives, commodities, futures and structured products. It is a home to approximately 3,400 listed companies and its main index is the NASDAQ Composite, which has been published since its inception. Stock market is also followed by S&P 500 index. Tokyo Stock Exchange - Headquartered in Tokyo. Market Capitalization (2011, USD Billions) 3,325; Trade Value (2011, USD Billions) 3,972. Third largest stock exchange market in the world by aggregate market capitalization of its listed companies. It had 2,292 companies which are separated into the First Section for large companies, the Second Section for mid-sized companies, and the Mothers section for high growth startup companies. The main indices tracking Tokyo Stock Exchange are the Nikkei 225 index of companies selected by the Nihon Keizai Shimbun, the TOPIX index based on the share prices of First Section companies, and the J30 index of large industrial companies. 94 domestic and 10 foreign securities companies participate in TSE trading. The London Stock Exchange and the Tokyo Stock Exchange are developing jointly traded products and share technology. London Stock Exchange - Headquartered in London. Market Capitalization (2011, USD Billions) 3,266; Trade Value (2011, USD Billions) 2,871. Located in London City, it is the oldest and fourth-largest stock exchange in the world. The Exchange was founded in 1801 and its current premises are situated in Paternoster Square close to St Pauls Cathedral. It is the most international of all the worlds stock exchanges, with around 3,000 companies from over 70 countries admitted to trading on its markets. The London Stock Exchange runs several markets for listing, giving an opportunity for different sized companies to list. For the biggest companies exists the Premium Listed Main Market, while in terms of smaller SMEs the Stock Exchange operates the Alternative Investment Market and for international companies that fall outside the EU, it operates the Depository Receipt scheme as a way of listing and raising capital. Shanghai Stock Exchange - Headquartered in Shanghai. Market Capitalization (2011, USD Billions) 2,357; Trade Value (2011, USD Billions) 3,658. It is the worlds 5th largest stock market by market capitalization and one of the two stock exchanges operating independently in the Peoples Republic of China. Unlike the Hong Kong Stock Exchange, the SSE is not entirely open to foreign investors. The main reason is tight capital account controls by Chinese authorities. The securities listed at the SSE include the three main categories of stocks, bonds, and funds. Bonds traded on SSE include treasury bonds, corporate bonds, and convertible corporate bonds. The largest company in SSE is PetroChina (market value 3,656.20 billion). Worlds major Financial Markets for Debt http://en.wikipedia.org/wiki/Bond_market Foreign Exchange http://en.wikipedia.org/wiki/Foreign_exchange_market

Commodities Definition of 'Commodity Market' A physical or virtual marketplace for buying, selling and trading raw or primary products. For investors' purposes there are currently about 50 major commodity markets worldwide that facilitate investment trade in nearly 100 primary commodities. Commodities are split into two types: hard and soft commodities. Hard commodities are typically natural resources that must be mined or extracted (gold, rubber, oil, etc.), whereas soft commodities are agricultural products or livestock (corn, wheat, coffee, sugar, soybeans, pork, etc.) There are numerous ways to invest in commodities. An investor can purchase stock in corporations whose business relies on commodities prices, or purchase mutual funds, index funds or exchange-traded funds (ETFs) that have a focus on commodities-related companies. The most direct way of investing in commodities is by buying into a futures contract.

International lending institutions World Bank

Introduction World Bank: The World Bank Group is one of the worlds largest sources of funding and knowledge for developing countries. The World Bank is a lending institution that funds essential infrastructural requirement, globally. World Bank as an institution that was designed for investment as well as providing loans. Functions: Provide funds for development projects Provide policy advice and technical assistance Promote investment in developing countries Extend grants for project preparation and institutional building Assistance to developing and transition countries Promote the economic development of the world's poorer countries Finance the poorest developing countries whose per capita GNP is less than $865 a year special financial assistance through the International Development Association (IDA) The Bank Group uses financial resources and extensive experience to help poor nations reduce poverty, increase economic growth, and improve the quality of life. World Bank provides technical and financial assistance to underdeveloped nations for development schemes like building roads, schools, hospitals, etc. The main aim is to eliminate poverty from the world. The World Bank collaborates with numerous other partners and multilateral organizations, including the World Health Organization (WHO) and the Food and Agriculture Organization (FAO), to realize the most far-reaching results possible.

Sources: Official Sources Other Development Banks Governments Export Credit Institutions Investment Banks Private Sector Investors Financial resources are acquired by borrowing on the international bond market. It issues bonds to raise money and then passes on the low interest rates to its borrowers. It is made up of 185 member countries. These countries are jointly responsible for how the institution is financed and how its money is spent. Groups Of World Bank: International Bank for Reconstruction and Development (IBRD) International Development Association (IDA) International Finance Corporation (IFC) Multilateral Investment Guarantee Agency (MIGA) International Centre for Settlement of Investment Disputes (ICSID)

IMF The International Monetary Fund (IMF) is an organization of 188 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. With its near-global membership of 188 countries, the IMF is uniquely placed to help member governments take advantage of the opportunitiesand manage the challengesposed by globalization and economic development more generally. The IMF tracks global economic trends and performance, alerts its member countries when it sees problems on the horizon, provides a forum for policy dialogue, and passes on know-how to governments on how to tackle economic difficulties. The IMF provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty. Marked by massive movements of capital and abrupt shifts in comparative advantage, globalization affects countries' policy choices in many areas, including labor, trade, and tax policies. Helping a country benefit from globalization while avoiding potential downsides is an important task for the IMF. The global economic crisis has highlighted just how interconnected countries have become in todays world economy. Key IMF activities The IMF supports its membership by providingpolicy advice to governments and central banks based on analysis of economic trends and cross-country experiences; research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets; loans to help countries overcome economic difficulties; concessional loans to help fight poverty in developing countries; andtechnical assistance and training to help countries improve the management of their economies. Original aims The IMF was founded more than 60 years ago toward the end of World War II (see History). The founders aimed to build a framework for economic cooperation that would avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s and the global conflict that followed. Since then the world has changed dramatically, bringing extensive prosperity and lifting millions out of poverty, especially in Asia. In many ways the IMF's main purposeto provide the global public good of financial stability is the same today as it was when the organization was established. More specifically, the IMF continues to provide a forum for cooperation on international monetary problems

facilitate the growth of international trade, thus promoting job creation, economic growth, and poverty reduction; promote exchange rate stability and an open system of international payments; and lend countries foreign exchange when needed, on a temporary basis and under adequate safeguards, to help them address balance of payments problems. An adapting IMF The IMF has evolved along with the global economy throughout its 65-year history, allowing the organization to retain its central role within the international financial architecture As the world economy struggles to restore growth and jobs after the worst crisis since the Great Depression, the IMF has emerged as a very different institution. During the crisis, it mobilized on many fronts to support its member countries. It increased its lending, used its cross-country experience to advise on policy solutions, supported global policy coordination, and reformed the way it makes decisions. The result is an institution that is more in tune with the needs of its 188 member countries. Stepping up crisis lending. The IMF responded quickly to the global economic crisis, with lending commitments reaching a record level of more than US$250 billion in 2010. This figure includes a sharp increase in concessional lending (thats to say, subsidized lending at rates below those being charged by the market) to the worlds poorest nations. Greater lending flexibility. The IMF has overhauled its lending framework to make it better suited to countries individual needs. It is also working with other regional institutions to create a broader financial safety net, which could help prevent new crises. Providing analysis and advice. The IMFs monitoring, forecasts, and policy advice, informed by a global perspective and by experience from previous crises, have been in high demand and have been used by the G-20. Drawing lessons from the crisis. The IMF is contributing to the ongoing effort to draw lessons from the crisis for policy, regulation, and reform of the global financial architecture. Historic reform of governance.The IMFs member countries also agreed to a significant increase in the voice of dynamic emerging and developing economies in the decision making of the institution, while preserving the voice of the low-income members. For brief History of IMF: http://www.imf.org/external/about/history.htm ALSO PPT ADB The Asian Development Bank (ADB) is a regional development bank established on 22 August 1966 to facilitate economic development of countries in Asia. The bank admits the members of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP, formerly known as the United Nations Economic Commission for Asia and the Far East) and non-regional developed countries. From 31 members at its establishment, ADB now has 67 members - of which 48 are from within Asia and the Pacific and 19 outside. ADB was modeled closely on the World Bank, and has a similar weighted voting system where votes are distributed in proportion with member's capital subscriptions. At present, both the United States and Japan hold 552,210 shares, the largest proportion of shares at 12.756% each. China holds 228,000 shares (6.429%), India holds 224,010 shares (6.317%), the 2nd and 3rd largest proportion of shares respectively. http://en.wikipedia.org/wiki/Asian_Development_Bank EBRD Founded in 1991, the European Bank for Reconstruction and Development (EBRD) uses the tools of investment to help build market economies and democracies in 30 countries from central Europe to central Asia. Its mission was to support the formerly communist countries in the process of establishing their private sectors. By the seventh meeting, representatives of 40 nations and two European institutions had reached agreement on the bank's charter, its initial size,and the distribution of power among shareholders.[2] Headquartered in London, the EBRD is now owned by 63 countries and two intergovernmental institutions. Despite its public sector shareholders, it invests mainly in private enterprises, usually together with commercial partners. EBRD provides project financing for banks, industries and businesses, both new ventures and investments in existing companies. It also works with publicly owned companies to support privatization, restructuring state-owned firms and improvement of municipal services. European Bank for Reconstruction and Development member states Members, only financing Members, recipients of investments The EBRDs mandate stipulates that it must only work in countries that are committed to democratic principles. The EBRD is directed by its founding agreement to promote, in the full range of its activities, environmentally sound and sustainable development.

The following countries are members and recipients of investments:[3] Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Estonia, Georgia, Hungary, Jordan, Kazakhstan, Kyrgyzstan, Latvia, Liechtenstein, Lithuania, Macedonia, Moldova, Mongolia, Montenegro, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Tajikistan, Tunisia, Turkmenistan, Ukraine and Uzbekistan. The Republic of Kosovo is set to join as a recipient member on 17 December 2012.[4] The following countries are financing members only: Australia, Austria, Belgium, Canada, Cyprus, Czech Republic (receiving member until 2007-12-31[5]), Denmark, Egypt, Finland, France, Germany, Greece, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, Malta, Mexico, Morocco, Netherlands, New Zealand, Norway, Portugal, South Korea, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States of America. Two European Union institutions are also financing members: the European Community and the European Investment Bank. In 2006 the organization stated that it would cease spending in the Baltic and central European nations by 2010, and funding would be shifted to Russia, Ukraine, Armenia, Kazakhstan and Uzbekistan.[6] Due to the financial crisis this graduation process was postponed till 2015.[7] Among the former communist countries only the Czech Republic has graduated within EBRD so far (this happened in 2007) and gained the status of the only ex-communist country that is a shareholder within EBRD and not a borrower any more.[8] The EBRD is not to be confused with the European Investment Bank (EIB) which is owned by the EU member states and supports EU policy http://en.wikipedia.org/wiki/European_Bank_for_Reconstruction_and_Development

Financing global trade Trade finance is related to international trade. While a seller (the exporter) can require the purchaser (an importer) to prepay for goods shipped, the purchaser (importer) may wish to reduce risk by requiring the seller to document the goods that have been shipped. Banks may assist by providing various forms of support. For example, the importer's bank may provide a letter of credit to the exporter (or the exporter's bank) providing for payment upon presentation of certain documents, such as a bill of lading. The exporter's bank may make a loan (by advancing funds) to the exporter on the basis of the export contract. Other forms of trade finance can include Documentary collection, trade credit insurance, export factoring, and forfaiting. Some forms are specifically designed to supplement traditional financing. [1] In many countries, trade finance is often supported by quasi-government entities known as export credit agencies that work with commercial banks and other financial institutions. Since secure trade finance depends on verifiable and secure tracking of physical risks and events in the chain between exporter and importer,the advent of new methodologies in the information systems world has allowed the development of risk mitigation models which have developed into new advanced finance models.[citation needed] This allows very low risk payment advances to exporters to be made,while preserving the importers normal payment credit terms and without burdening the importers balance sheet.[citation needed] As the world progresses towards more flexible, growth oriented funding sources post the global banking crisis,the demand for these new methodologies has increased dramatically amongst exporters,importers and banks.[citation needed] Trade finance refers to financing international trading transactions. In this financing arrangement, the bank or other institution of the importer provides for paying for goods imported on behalf of the importer. Buyers credit A financial arrangement in which a bank or financial institution, or an export credit agency in the exporting country, extends a loan directly to a foreign buyer or to a bank in the importing country to pay for the purchase of goods and services from the exporting country. Also known as financial credit. This term does not refer to credit extended directly from the buyer to the seller (for example, through advance payment for goods and services). The Practicla example is that foreign Bank makes payment to exporter based on either Letter of Undertaking from the Importer bank or based on their risk on Importer. Letter of Undertaking is simply confirmation by a bank here in importer country to pay to exporter bank thus exporter bank risk get reduced. The Letter of undertaking is issued by Importer bank on the basis of risk on Importer.

Simply, Importer Bank takes risk on Importer , This bank sends LOU to exporter bank which in turn takes risk on Importer bank and makes payment. On fimal day Importer bank recover money from importer and makes payment to exporter bank. This all exercise is done to exploit existance of interest rate arbitrage Buyer's credit is the credit availed by an importer (buyer) from overseas lenders, i.e. banks and financial institutions for payment of his imports on due date. The overseas banks usually lend the importer (buyer) based on the letter of comfort (a bank guarantee) issued by the importers bank. Importer's bank or Buyers Credit Consultant or importer arranges buyer's credit from international branches of a domestic bank or international banks in foreign countries. For this service, importer's bank or buyer's credit consultant charges a fee called an arrangement fee. Buyer's credit helps local importers gain access to cheaper foreign funds close to LIBOR rates as against local sources of funding which are costly compared to LIBOR rates. The duration of buyer's credit may vary from country to country, as per the local regulations. For example in India, buyer's credit can be availed for one year in case the import is for trade-able goods and for three years if the import is for capital goods. Every six months, the interest on buyer's credit may get reset.Contents [hide] Benefits to importer The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per the cash flows The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail financing. The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer. The importer can use this financing for any form of trade viz. open account, collections, or LCs. The currency of imports can be different from the funding currency, which enables importers to take a favourable view of a particular currency. Steps involved The customer will import the goods either under LC, collections or open account The customer requests the Buyer's Credit Arranger before the due date of the bill to avail buyers credit financing Arrange to request overseas bank branches to provide a buyer's credit offer letter in the name of the importer. Best rate of interest is quoted to the importer Overseas bank to fund Importer's bank Nostro account for the required amount Importer's bank to make import bill payment by utilizing the amount credited (if the borrowing currency is different from the currency of Imports then a cross currency contract is utilized to effect the import payment) Importer's bank will recover the required amount from the importer and remit the same to overseas bank on due date. It helps importer in working capital management. Cost involved Interest cost: is charged by overseas bank as a financing cost Letter of Comfort / Undertaking: Your existing bank would charge this cost for issuing letter of comfort / Undertaking Forward Booking Cost / Hedging cost Arrangement fee: Charged by person who is arranging buyer's credit for buyer. Risk premium: Depending on the risk perceived on the transaction. Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges. WHT (Withholding tax): The customer may have to pay WHT on the interest amount remitted overseas to the local tax authorities depending on local tax regulations. In case of India, the WHT is not applicable where Indian banks arrange for buyer's credit through their offshore offices. Supplier credit A financing arrangement under which an exporter extends credit to a foreign importer to finance his purchase. Usually the importer pays a portion of the contract value in cash and issues a Promissory note or accepts a draft as evidence of his obligation to pay the balance over a period of time. The exporter thus accepts a deferred payment from the importer, and may be able to obtain cash payment by discounting or selling the draft or promissory notes created with his bank. Compare with Buyers credit. Role of credit-rating agencies I. The Role Of Credit Ratings A. Reducing information asymmetry 2.One way to describe the role of credit ratings is in terms of how information, or the lack of it, affects the actions of participants in financial markets. In short, credit ratings can help reduce the knowledge gap, or "information asymmetry," between borrowers (issuers) and lenders (investors). The essential subject matter of this information

asymmetry is a borrower's creditworthiness. A borrower knows its own creditworthiness better than a lender does. And because creditworthiness is not a directly observable attribute, a lender generally has to estimate it from attributes that are observable, using various approaches. One is to perform its own analysis; another is to use credit ratings from independent rating agencies; and another is to use information and analysis provided by third parties or other analysts. Using multiple approaches will likely permit a lender to be more confident about its conclusions, especially if the approaches lead to the same result. 3.1. Creampuffs and lemons. The concept of asymmetric information is well established in economic theory. Profs. George Akerlof, Michael Spence, and Joseph Stiglitz shared the 2001 Nobel Prize in Economics for their work on markets with asymmetric information. Akerlof explained the concept using the highly illustrative example of the used-car market (Akerlof, 1970), which we paraphrase here. 4. Posit that every car is either good (a "creampuff") or bad (a "lemon"). The buyer of a new car doesn't know before his purchase whether the car is a creampuff or a lemon. Rather, he gains that knowledge after owning the car for a sufficient period of time (say, a year). 5. Now suppose that the owner of a creampuff wants to sell his car, and that a used creampuff is really worth $10,000, while a used lemon is worth only $2,000. The owner knows that his car is a creampuff, but potential buyers do not. As such, potential buyers, concerned that the car could be a lemon, will be unwilling to pay $10,000 for it. If there is a chance that the car could be either a creampuff or a lemon, buyers might be willing to pay some price between $2,000 and $10,000. However, buyers will also figure out that sellers will be reluctant to sell creampuffs if they can't realize what the cars are worth, which means that most or all of the used cars offered for sale will be lemons. Accordingly, buyers will likely refuse to pay more than $2,000 for a used car. Thus, the seller of a used creampuff would likely be unable to get a buyer to pay the fair price. The whole problem boils down to information asymmetry between the seller and the buyer: The seller knows whether the car is a lemon or a creampuff, while the buyer lacks that knowledge. 6. One commentator (Tuch, 2010) concisely summarized the "lemons" problem, as follows: 7. "Unable to distinguish between high-quality products and low-quality products ('lemons'), buyers will offer the same (discounted) price for both. High-quality products will not be offered for sale, effectively being driven out of the market by lemons. The market may even collapse." 8. A simple theoretical application of the lemons principle in credit markets might go as follows: Lenders, in the role of potential used-car buyers, would be unable to distinguish high-risk borrowers (lemons) from low-risk borrowers (creampuffs). Therefore, a lender would charge all borrowers the same rate of interest: the one necessary to cover the risk of lending to a high-risk borrower. Just like the seller of a creampuff could expect to sell his car only for the price of a lemon, a low-risk borrower would have to pay the same interest rate as a high-risk one. In such a situation, the volume of borrowing by low-risk borrowers would suffer, and lenders would misallocate productive resources away from low-risk borrowers. This suggests that economic output would be suboptimal. 9.2. Credit ratings help close the information gap. In the real world, of course, this problem is one of gradations, rather than absolutes. A real-world lender has some ability to distinguish between high-risk and low-risk borrowers, but that ability is imperfect. Although the lender may be able to correctly characterize potential borrowers most of the time, it will inevitably mischaracterize some. In addition, borrowers' riskiness spans a continuum; there are not merely two categories. Although a lender can adjust the interest rates it charges based on its assessments of borrowers' riskiness, these adjustments may be suboptimal because the assessments may be imprecise or inaccurate. 10. Enter credit ratings. By combining credit ratings with its own analysis, a lender can potentially better distinguish among borrowers of different creditworthiness. By using ratings as an independent, unbiased "second opinion," the lender may be able to more accurately map the interest rates it charges to the true riskiness of the borrowers. The overall result should be a superior allocation of limited capital to productive uses. 11. Interestingly, in his 1970 article, Akerlof used credit markets as an example of the lemon principle in operation, with a focus on credit markets in less-developed countries. Akerlof concluded the article by noting that markets develop responses to "counteract the effects of uncertainty." He identifies four types of responses: guarantees, brand-name goods, chains (such as restaurant and hotel chains), and licensing of service providers, such as doctors, lawyers, and barbers. 12. More recently, other scholars have highlighted the role of credit ratings in reducing information asymmetry. For example, researchers at the Bank of England recently stated:

13. "Rating agencies originally emerged to assist dispersed investors in monitoring issuers in the debt capital markets. By assigning an objective measure of credit quality to debt issues, based on independent analysis of issuersupplied financial information, CRAs can help to reduce information asymmetries between investors and borrowers. This can widen market participation and contribute to deeper, more liquid markets." (Deb et al., 2011, p. 3) 14. Likewise, a noted legal scholar described the credit rating agencies' activities in terms of information asymmetry, as follows: 15. "The debt-rating agency is in this sense a solution to the classic 'market for lemons' problem. In principle, given the prospect of fraud and default, an issuer will be forced to pay the interest rate applicable to the average quality issuer unless it can credibly signal its superior credit to the market. Such a market and inefficient average cost pricing typically arise when the individual competitor cannot credibly distinguish its product from the herd of similar products." (Coffee, 2006, p. 309, n. 20) 16. Over the years, various other commentatorsmostly from academic or policy orientationshave observed that the role of credit ratings is to address information asymmetry in credit markets. Examples include Partnoy (1999), White (2001), Schwarcz (2002), Carron et al. (2003), Bank for International Settlements (2005), Fulghieri et al. (2010), Opp et al. (2011), Rousseau (2011), and Kiff et al. (2012). However, most of them simply make the point in passing and do not pursue it to any depth, and some reach conclusions or policy recommendations that appear to imply a different type of role entirely. For the most part, they focus greater attention on the mechanics of how credit rating agencies operate day-to-day than on the actual role of credit ratings in the decision-making processes of investors and issuers. B. Improving market function and efficiency 17. Another way to describe the role of credit ratings is in terms of "market efficiency." This description focuses on how credit ratings contribute to the operation of markets, rather than on how they affect specific market participants in specific transactions. Essentially, credit ratings reduce the ability of one investor to outperform another by making better judgments about creditworthiness. In this view, ratings act as an equalizer in the fixed-income capital markets, helping to put investors on more equal footing. Various commentators, including Schwarcz (2002), Carron et al. (2003), Opp (2011), Deb et al. (2011), and Rousseau (2011), have recognized credit ratings' efficiency-enhancing role. Ultimately, though, the "market efficiency" description and the "asymmetric information" description amount to the same thing. The mechanism through which credit ratings improve market efficiency is by reducing information asymmetries. C. How credit ratings fulfill their role 18. Credit ratings fulfill their role in the markets in several ways. The most obvious is by serving as an unbiased, independent "second opinion" that an investor can use to confirm or refute his or her own analysis. Beyond that ideal case, however, credit ratings may also mitigate information asymmetry in some less obvious ways. 19. For example, some institutional investors include credit ratings in their investment policies for fixed-income investments. Such an investment policy does not delve into the nuances of different kinds of bonds, but rather uses credit ratings as screens to disqualify securities that exceed a maximum threshold of credit risk. In such cases, the credit rating is a necessarybut not, in itself, sufficientcondition for investing in a given security. The investor is using credit ratings to screen securities before conducting its own analysis and before examining research and analysis from other outside sources. In such a case, credit ratings mitigate information asymmetry in two ways. First, by providing the screen that helps the institution to apply its analytical resources most effectively, and second, by supplying an unbiased, independent "second opinion" of the security's creditworthiness. 20. In many cases, when an issuer obtains a credit rating on its own securities, it is trying to send investors a signal about its creditworthiness. In the context of the used-car example, the issuer wants to signal that it is not a "lemon." By reducing uncertainty about its creditworthiness, an issuer may achieve lower costs of borrowing than it would otherwise have. D. Implications of the role, and how regulatory use of credit ratings can distort it 21. Rating agencies' role in the market is significant, but it is also specialized and somewhat limited. The main flow of information in the capital markets is from issuers to investors. A secondary flow of information comes from exchanges, data vendors, and trading desks in the form of prices and trading flows. Rating agencies provide a third source of additional information consisting of independent credit opinions. Credit ratings can contribute to an investor's decision-making process, but they are not a substitute for the investor's own analysis or for information from other sources. 22. Some market participants, however, perceive a larger role for credit ratings, in the form of promoting financial stability or preventing asset bubbles and financial crises. They assert that credit ratings can cause or exacerbate a bubble or a crisis. Examples include Arezki et al. (2011), Coffee (2010), Deb et al. (2011), He et al. (2011), and Kiff et al. (2012). White (2009) and others have argued that decades of regulatory use elevated credit ratings to a point of

amplified significance, giving them the "force of law." That point, however, ignores or misconstrues the true role of credit ratings, focusing rather on distortions of their role that regulatory or other unintended uses have caused. 23. The regulatory use of credit ratings (and certain practices described in Part IV) can produce unintended effects. These can include distorting the decision-making processes of market participants and causing them to deemphasize or misunderstand the information that ratings actually provide. Such distortions, in turn, can contribute to or exacerbate an asset bubble or a financial crisis. 24. The regulatory use of private-sector gatekeepersincluding rating agenciesrests on the notion that using gatekeepers helps to reduce improper behavior among the market's primary participants (issuers and investors). This assumption, in turn, relies on the premise that a gatekeeper actually can influence the behavior of an issuer's management (Tuch, 2010). Only when regulatory use distorts and amplifies a gatekeeper's role does its influence start to overshadow the other motivations and considerations of the primary market participants. 25. Policymakers around the globe have come to understand this mechanism and to respond appropriately. For example, Section 939A of the Dodd-Frank Act directs U.S. regulatory agencies to eliminate or minimize their use of credit ratings. The European Union has also proposed legislation that includes a similar provision. 26. When used as intendedas independent "second opinions" to help investors make investment decisionscredit ratings have no special ability to prevent or to cause asset bubbles or financial crises. Indeed, rating agencies are no more able than other participants in the capital markets to predict (much less prevent) financial bubbles or adverse macroeconomic trends. III. What Credit Ratings Are 27. Credit rating symbols convey information. More specifically, they convey forward-looking, summary opinions about a borrower's or a security's creditworthiness. They summarize the conclusions of a rating agency's credit analysis, which its analysts explain more fully in a published report. Credit rating symbols are valuable because they provide summary opinions about creditworthinessa complex, multidimensional phenomenonusing simple, onedimensional rating scales. The challenge for a rating agency is to ensure that its methodology properly weights the diverse factors that contribute to a security's creditworthiness in a way that is useful to investors.(2) 28. A look at the origins of credit ratings reveals much about their fundamental nature. Rating agencies developed as information businesses. There was a knowledge gap between borrowers and investors, and rating agencies seized the opportunity to create and publish information about the creditworthiness of major borrowers. Investors used this informationin the form of credit opinionsto help make decisions. So essentially, rating agencies developed as a response to asymmetric information. 29. From a slightly different perspective, credit ratings are a specialized type of securities research, similar to what independent securities analysts and analysts at sell-side firms produce. Like such research, credit ratings embody forward-looking opinions designed to contribute to an investor's decision-making process. However, instead of providing opinions about the overall investment merit of specific securities or types of securities (which embodies many different dimensions, including creditworthiness), a credit rating addresses creditworthiness only. Accordingly, credit rating agencies operate only in the fixed-income arena, while securities analysts cover the entire landscape of the capital markets. 30. Another similarity between credit ratings and research by securities analysts is that both rating agencies and securities research departments establish their own analytic methodologies. Although different securities analysts use many of the same financial ratios when they analyze companies, there is no standardization in how they weight the various ratios and qualitative factors that inform a final recommendation. Likewise, rating agencies as a group do not follow a single set of methodologies when they analyze credits. There are, in fact, many reasonable approaches to analyzing credit. Each rating agency chooses the methodology it thinks is best, drawing on its own credit research and decades of observations. 31. Another similarity between credit ratings and other third-party research is that rating agencies and research departments each have distinct definitions for their nomenclature for recommendations. For example, some sell-side research departments use simple three-step systems (e.g., buy, hold, sell), while others choose systems with more gradations (Fuchita & Litan, 2006, p. 144). Likewise, each rating agency defines the meanings of its rating symbols, which are the vocabulary through which it communicates a summary of its analysis on a given credit. Indeed, there is some evidence that different rating agencies calibrate their rating scales somewhat differently (Cantor & Packer, 1994). 32. The market can gain enormous value from the range of approaches and methodologies in use among securities analysts and rating agencies. This diversity offers investors multiple points of view to consider when making investment decisions. A single point of view would be less helpful.

33. Credit ratings can be compared to a host of other types of opinion products as well (see the table below, which compares key attributes of some selected rating systems). Some rating systems are forward-looking and aim to help users make decisions. Others are purely "historical" and don't offer any practical use. Some use a pass/fail system, while others offer graduated scales. Some reflect measures in absolute terms, while others give relative rankings. Some are multidimensional, with a conclusion that draws from a variety of factors, while others measure a single factor only. Finally, some have narrow, specialized applications, while others have broader uses. Against this backdrop, credit ratings from the major rating agencies (i) are forward-looking, with an aim to support decisionmaking, (ii) use graduated scales, (iii) provide relative rankings, (iv) reflect multiple factors that may influence creditworthiness, and (v) are designed specifically to address creditworthiness and no other investment considerations. ECGC What is ECGC? Export Credit Guarantee Corporation of India Ltd. ( ECGC ) is a Government of India Enterprise which provides export credit insurance facilities to exporters and banks in India. It functions under the administrative control of Ministry of Commerce & Industry, and is managed by a Board of Directors comprising representatives of the Government, Reserve Bank of India, banking , insurance and exporting community. Over the years, it has evolved various export credit risk insurance products to suit the requirements of Indian exporters and commercial banks. ECGC is the seventh largest credit insurer of the world in terms of coverage of national exports. The present paid up capital of the Company is Rs. 1000 Crores and the authorized capital is Rs. 1000 Crores. ECGC is essentially an export promotion organization, seeking to improve the competitive capacity of Indian exporters by giving them credit insurance covers comparable to those available to their competitors from most other countries. It keeps it's premium rates at the lowest level possible. Vision The vision of Export Credit Guarantee Corporation of India Ltd. Is to excel in providing export credit insurance and trade related services. Mission The mission of ECGC is to support the Indian Export Industry by providing cost effective insurance and trade related services to meet the growing needs of Indian export market by optimal utilization of available resources. What does ECGC do? Provides a range of credit risk insurance covers to exporters against loss in export of goods and services Offers Export Credit Insurance covers to banks and financial institutions to enable exporters to obtain better facilities from them Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan How does ECGC help exporters? ECGC Offers insurance protection to exporters against payment risks Provides guidance in export-related activities Makes available information on different countries with it's own credit ratings Makes it easy to obtain export finance from banks/financial institutions Assists exporters in recovering bad debts Provides information on credit-worthiness of overseas buyers Need for export credit insurance Payments for exports are open to risks even at the best of times. The risks have assumed large proportions today due to the far-reaching political and economic changes that are sweeping the world. An outbreak of war or civil war may block or delay payment for goods exported. A coup or an insurrection may also bring about the same result. Economic difficulties or balance of payment problems may lead a country to impose restrictions on either import of certain goods or on transfer of payments for goods imported. In addition, the exporters have to face commercial risks of insolvency or protracted default of buyers. The commercial risks of a foreign buyer going bankrupt or losing his capacity to pay are aggravated due to the political and economic uncertainties. Export credit insurance is designed to protect exporters from the consequences of the payment risks, both political and commercial, and to enable them to expand their overseas business without fear of loss.

Objectives of ECGC The Corporation has set before itself the following objectives: 1. To encourage and facilitate globalization of Indias trade.

2. To assist Indian exporters in managing their credit risks by providing timely information on worthiness of the buyers, bankers and the countries. 3. To protect the Indian exporters against unforeseen losses, which may arise due to failure of the buyer, bank or problems faced by the country of the buyer by providing cost effective credit insurance covers in the form of Policy, Factoring and Investment Insurance Services comparable to similar covers available to exporters in other countries. 4. To facilitate availability of adequate bank finance to the Indian exporters by providing surety insurance covers for bankers at competitive rates. 5. To achieve improved performance in terms of profitability, financial and operational efficiency indicators and achieve optimum return on investment. 6. To develop world class expertise in credit insurance among employees and ensure continuous innovation and achieve the highest customer satisfaction by delivering top quality service. 7. To educate the customers by continuous publicity and effective marketing. History of ECGC The need for export promotion had started immediately after Independence in 1947. In 1953, a proposal for initiation of an export credit guarantee scheme was put forward at a meeting of the Export Advisory Council . Ministry of Commerce & Industry analyzed in depth the pros and cons of the Export Credit Insurance Scheme and a revised draft proposal on the scheme was presented to the Export Advisory Council in 1955. Shri T T Krishnamachari, Finance Minister in Pandit Nehrus cabinet appointed a special committee under the Chairmanship of Shri T.C.Kapur to examine the feasibility of setting up an effective organization to provide insurance against export credit risks. The Government accepted the recommendations of Kapur Committee and thus the Export Risk Insurance Corporation (ERIC) was registered on 30th July 1957 in Mumbai as a Private Ltd. Company, entirely state owned, under the Companies Act with an authorized capital of Rs.5 crores and paid up capital of Rs.25 lakhs. Shri Ratilal M Gandhi was the First Chairman and Shri T C Kapur was the First Managing Director of the Corporation. Shri Morarji Desai, Union Commerce Minister inaugurated ERIC and the first Policy was issued on 14th October 1957. After introduction of insurance covers to banks during the period 1962-64, ERICs name was changed to Export Credit & Guarantee Corporation Ltd in 1964. To bring Indian identify in the name, ECGC was renamed as Export Credit Guarantee Corporation of India Ltd in the year 1983. EXIM Banks.

Export-Import Bank of India is the premier export finance institution of the country, set up in 1982 under the Export-Import Bank of India Act 1981. Government of India launched the institution with a mandate, not just to enhance exports from India, but to integrate the countrys foreign trade and investment with the overall economic growth. Since its inception, Exim Bank of India has been both a catalyst and a key player in the promotion of cross border trade and investment. Commencing operations as a purveyor of export credit, like other Export Credit Agencies in the world, Exim Bank of India has, over the period, evolved into an institution that plays a major role in partnering Indian industries, particularly the Small and Medium Enterprises, in their globalisation efforts, through a wide range of products and services offered at all stages of the business cycle, starting from import of technology and export product development to export production, export marketing, pre-shipment and post-shipment and overseas investment. THE INITIATIVES Exim Bank of India has been the prime mover in encouraging project exports from India. The Bank provides Indian project exporters with a comprehensive range of services to enhance the prospect of their securing export contracts, particularly those funded by Multilateral Funding Agencies like the World Bank, Asian Development Bank, African Development Bank and European Bank for Reconstruction and Development. The Bank extends lines of credit to overseas financial institutions, foreign governments and their agencies, enabling them to finance imports of goods and services from India on deferred credit terms. Exim Banks lines of Credit obviate credit risks for Indian exporters and are of particular relevance to SME exporters.

The Banks Overseas Investment Finance programme offers a variety of facilities for Indian investments and acquisitions overseas. The facilities include loan to Indian companies for equity participation in overseas ventures, direct equity participation by Exim Bank in the overseas venture and non-funded facilities such as letters of credit and guarantees to facilitate local borrowings by the overseas venture. The Bank provides financial assistance by way of term loans in Indian rupees/foreign currencies for setting up new production facility, expansion/modernization/upgradation of existing facilities and for acquisition of production equipment/technology. Such facilities particularly help export oriented Small and Medium Enterprises for creation of export capabilities and enhancement of international competitiveness. Under its Export Marketing Finance programme, Exim Bank supports Small and Medium Enterprises in their export marketing efforts including financing the soft expenditure relating to implementation of strategic and systematic export market development plans. The Bank has launched the Rural Initiatives Programme with the objective of linking Indian rural industry to the global market. The programme is intended to benefit rural poor through creation of export capability in rural enterprises. In order to assist the Small and Medium Enterprises, the Bank has put in place the Export Marketing Services (EMS) Programme. Through EMS, the Bank seeks to establish, on best efforts basis, SME sector products in overseas markets, starting from identification of prospective business partners to facilitating placement of final orders. The service is provided on success fee basis. Exim Bank supplements its financing programmes with a wide range of value-added information, advisory and support services, which enable exporters to evaluate international risks, exploit export opportunities and improve competitiveness, thereby helping them in their globalisation efforts. THE LEADERSHIP Since inception, Exim Bank has had, at the helm of its affairs, leading banking professionals as Chief Executive Officers. Shri R.C. Shah, a seasoned banker, with vast commercial and international banking experience, was the first Chairman and Managing Director of Exim Bank during January 1982-January 1985. His vision helped the setting up of the institution as a unique organizational model, with a flat, non-hierarchical culture, multi-disciplinary approach to problem solving, access to the latest technology and a climate for innovation. He was succeeded by Shri Kalyan Banerji, who was the Chairman and Managing Director during February 1985-April 1993. Shri Banerji had long years of commercial banking experience, with exposure to international banking. Ms. Tarjani Vakil took over as the Chairperson and Managing Director of the Bank in August 1993 and guided the institution in its endeavours for export capability creation, till October 1996. Ms. Vakil had long years of development banking experience and was associated with Exim Bank since its inception. She was succeeded by Shri Y.B. Desai, who was the Managing Director of the Bank during August 1997-April 2001. Shri Desai had vast commercial banking experience and joined Exim Bank in the initial years of the institution. Shri T.C. Venkat Subramanian took over as Chairman and Managing Director of Exim Bank from May 1, 2001. Shri Subramanian has both commercial banking and development banking experience and has been associated with Exim Bank since its inception. Under the stewardship of Shri Subramanian, Exim Bank has crossed significant milestones in business promotion as well as other initiatives as the premier export finance institution of the country. OBJECTIVES for providing financial assistance to exporters and importers, and for functioning as the principal financial institution for coordinating the working of institutions engaged in financing export and import of goods and services with a view to promoting the countrys international trade shall act on business principles with due regard to public interest

The Export-Import Bank of India Act, 1981

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