Banking Material

Workshop on Banking Symbiosis
Part I - Banking
Introduction
WHAT IS A BANK AND WHAT IS BANKING?
The present day banking has its origin in U.K. Their early role was to safe keep the money
deposited by the local citizens and charge them a small fee for the same. Slowly the
bankers started realising that they could use this money by lending it to those who
needed it. That was the beginning of "deposit" and "loan". Thus "financial intermediary"
was born - "financial intermediary" simply meaning that money flows through them from
the "money-surplus" units to "money-needed" units.
The depositors would be paid certain amount and the borrowers of this money would be
charged certain amount, called "interest". There would obviously be difference between
the amount of interest paid to depositors and the amount of interest recovered from the
borrowers. This would be the profit for the financial intermediary, which is a bank. This is
the foundation for today's "retail banking".
With the growth in commerce, first within a country and then globally, banking started
transcending first the regional boundaries and then the national boundaries. That is how
"international banking" started. Even today, international banking caters to "international
trade" to a major extent.
While primarily the banking function revolved around acceptance of deposits and granting
of loans, the customers started feeling the need for other services. These services were:
remittance of funds from one place to another place, purchase of securities on behalf of
its customers, safe custody of important documents, safe deposit vault services etc.
Thus slowly the services extended by banks went on expanding. Today in India, any
medium sized or large commercial bank extends the following services:
♦ Acceptance of deposits of various kinds – deposits that can be withdrawn on demand

like Savings/Current Accounts or those deposits that have a fixed maturity date, like,
Fixed Deposit Accounts, Recurring Deposit Accounts etc.
♦ Extending loans to borrowers in the form of Loans and Overdraft (This overdraft
facility in India is called "Cash Credit" facility in the case of business enterprises)
♦ Extending financial assistance to exports on soft terms
♦ Remittance of funds from one place to another place by various modes like Mail
Transfer (M.T.), Telegraphic Transfer (T.T.), Demand Drafts (D.D.), Electronic Fund
Transfer (E.F.T.) etc.
♦ Collection of bills for commercial transactions tendered by its customers facilitating
commerce within the country as well as outside the country.
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♦ Safe custody services for safe keeping of important documents
♦ Safe Deposit Vault services (SDV) for personal safe keeping of documents, cash,
jewellery etc.
♦ Foreign exchange transactions involving import/export of goods and remittance of
foreign exchange (both outward and inward)
♦ Issuing letters of undertaking to suppliers of goods and/or services through their
bankers which are called “Letters of Credit” (L/C)
♦ Issuing Bank Guarantees on behalf of its customers in favour of various beneficiaries
including Government Agencies (B/G)
♦ Obtaining credit reports from other Banks and specialised Credit Agencies on
customers (both within India and outside India) as well as providing Credit Information
about its customers to other Credit Agencies.
♦ Doing Government business, like payment of pension, collection of direct tax (like
income tax) and indirect taxes (like excise duty).
♦ Extending Counselling Services to its customers on International Trade, Loan
Arrangements (Syndication), when to come out with public issue of equity shares etc.
♦ Extending cash withdrawal facilities through Automated Teller Machines/Any Time
Money (ATMs).
♦ Carrying out standing instructions of customers for receipt of payments (amount
credited to customers’ accounts) and making of payments (amount debited to the
customers’ accounts).
♦ Issue of International Money Orders (IMO), Travellers’ Cheques (TC), both in Indian
Rupee and Foreign Currency to travellers, exchanging Indian Rupee for Foreign
Currency Travellers cheques from foreign tourists/visitors, issue of Foreign Currency
to those who travel abroad/exchanging foreign currency for Indian Rupee , payment to
International Credit Card Agencies, issue of Credit Cards to domestic customers etc.
♦ Acceptance of deposits from non-resident Indians
♦ Arrangement of international finance to its customers as well as managing issue of
Global Depository Receipts (GDR)/American Depository Receipts (ADR)/ Euro-Bonds
etc.
♦ Investment in Govt. securities, shares of blue chip companies etc. for its own portfolio.
♦ Extending custodial services (please refer to chapter on banking terms)
DIFFERENCE BETWEEN RETAIL BANKING AND WHOLESALE BANKING
Wholesale banking typically involves a small number of very large customers such as big
corporations and governments, whereas retail banking consists of a large number of small
customers who consume personal banking and small business services. Wholesale banking
is largely inter-bank; banks use the inter-bank markets to borrow from or lend to other
banks/large customers, to participate in large bond issues and to engage in syndicated
lending. Retail banking is largely intra-bank; the bank itself makes many small loans.
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Most of the Indian public sector banks practise retail banking, while the concept of
“wholesale banking” is slowly being practised by them. On the other hand, most of the
well-established foreign banks in India and the recent private sector banks practise
wholesale banking alongside retail banking.
As a result of this difference, the composition of income for a public sector bank and a
well-established private sector bank is different. While a major portion of the income for
large public sector banks is from lending operations, in the case of any private sector bank
in India, the amount of non-operating income (other than interest income) is substantially
higher. The composition of other income is - commission on bills/guarantees/letters of
credit, counselling fees, syndication fees (arrangement for loans), credit report fees, loan
processing fees, correspondent bank charges (please see next chapter for the meaning of
correspondent bank) etc. Internationally also, in the case of any bank, the non-interest
income is substantially more than interest income. This is considered as a healthy sign, as
the investment required for earning non-interest income is negligible. Non-interest
income is from activities, which are not fund based but fee-based. Hence very little
capital is required to carry on such activities.
Note: The significance of important banking terms used in the course material is
explained in the next chapter. "Global banking" activities are an extension of various
activities listed above into the international market. Global banking primarily consists of
trade in international banking services and establishment of branches and subsidiaries in
foreign countries.
WHAT IS A SCHEDULED BANK IN INDIA?
In India, the Central Banking Authority is the Reserve Bank of India (RBI); it is also
referred to as the "Apex Bank". It functions under an act called The Reserve Bank of
India Act, 1934. All the banks and other financial institutions operating in India come
under the monitoring and control of RBI. RBI controls the banking sector in India through
an act called "The Banking Regulations Act". In the past, when there were very few banks,
RBI used to include all the "scheduled" banks in its Schedule. Nowadays, when the number
of banks has gone up substantially, RBI has to change the schedule every now and then.
Hence irrespective of whether a bank finds its name in the schedule to the RBI Act or
not, its "schedule status" can be found out from its banking licence. A bank that is not a
scheduled bank is referred to as "non-scheduled" bank even in its banking licence.
The difference lies in the type of banking activities that a bank can carry out in India. In
the case of a scheduled bank, it is licensed by the RBI to carry on extensive banking
operations including foreign exchange operations, whereas, a non-scheduled bank can carry
out only limited operations. There are a number of factors considered by RBI to declare a
bank as a "scheduled bank", like the amount of share capital, type of banking activities
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that the bank is permitted to carry out etc. An example of difference between a
scheduled and non-scheduled bank is dealing in "Foreign Exchange".
WHAT IS THE DIFFERENCE BETWEEN A COMMERCIAL BANK AND A CO-OPERATIVE

BANK?
A commercial bank is run on commercial lines, for profits of the organisation. A co-
operative bank on the other hand is run for the benefit of a group of members of the co-
operative body. A co-operative bank distributes only a very small portion of its profit as
dividend, retaining a major portion of it in business.
All the nationalised banks in India and almost all the private sector banks are commercial
scheduled banks. There are a large number of private sector co-operative banks and most
of them are non-scheduled banks. In the public sector also, within a state, starting from
the State Capital, there are State Co-operative Banks (example: in Karnataka, we have
Karnataka State Co-operative Bank) and District Central Co-operative Banks at the
district level. Under the District Central Co-operative Bank, there are Co-operative
Societies. At present, in India, the banks can be bifurcated into following categories.
Category 1 – Public Sector banks (also referred to as "nationalised banks"), which are
commercial and scheduled. Examples: State Bank of India, Bank of India etc.
Category 2 – Private Sector banks, which are commercial and scheduled. These could be
foreign banks as well as Indian Banks. Examples: Foreign Bank - CITI Bank, Standard
Chartered Bank etc. Indian Bank - Bank of Rajasthan Limited, Vysya Bank Limited etc.
Category 3 – Private Sector banks, which are co-operative and scheduled. These are large
co-operative sector banks but which are scheduled banks. Examples: Saraswat Co-
operative Bank Limited, Shamrao Vithal Co-operative Bank Limited, Cosmos Co-operative
Bank Limited etc.
Category 4 – Private Sector banks, which are co-operative and non-scheduled. These are
small co-operative banks but which are non-scheduled. Examples: Local co-operative banks
which operate within a town or a city, like Mahesh Sahakari Bank Limited etc.
Category 5 – Public Sector banks, which are co-operative and non-scheduled. These are
state owned banks like the Maharashtra State Co-operative Bank (State level), Pune
District Central Co-operative Bank (District level) and Junnar Co-operative Society etc
(primary level).
Category 6 – Regional Rural Banks which are state owned and have different roles
assigned to them. They are outside the purview of our discussions
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Category 7 – Gramin Banks that are also state owned and have different roles assigned to
them. They are also outside the purview of our discussions.
Note - During the course of the workshop, we will be discussing the activities of a
scheduled bank.
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2.2 Banking Terms - Different Bank Accounts - Bank Facilities -
Determination of interest on deposits and advances
DIFFERENT BANK ACCOUNTS - DEPOSITS
1. Deposit account offering withdrawal facility – Savings Bank Account as well as Current
Account. The nomenclature of the Savings Bank Account is different in different
countries. For example, Savings Bank Account with withdrawal facility through Cheques
is referred to as "Check Accounts" in the USA. In India, while the balances in the
Savings Bank Accounts get interest, the balances in the Current Accounts do not get
interest.
2. Deposit account without withdrawal facility – different categories –

♦ Lump sum investment for specific periods, after which the principal amount is paid
back together with interest for the entire deposit period. This is on a cumulative basis
or reinvestment basis.
♦ Lump sum investment for specific periods and interest is paid on a periodic basis. The
principal amount is paid back on maturity/due date.
♦ Lump sum investment for specific periods and interest together with a part of the
principal amount is paid periodically with last instalment payable on due date/maturity
date.
♦ Periodic investment, mostly on a monthly basis and repayment on a cumulative basis,
both principal and interest amounts – example, recurring deposit accounts
♦ Periodic investment, less frequent than the previous one but investment is usually
substantial and repayment on a cumulative basis together with interest. Periodic
investments may not be of the same size.
DIFFERENT BANK ACCOUNTS – ADVANCES AND LOANS
1. Overdraft – An extension of current account in which the customer is allowed to

withdraw more than the credit balance lying in the account. This may be a temporary
accommodation to tide over temporary cash crunch or on a regular basis. If permitted
on a regular basis, withdrawals are allowed up to a ceiling (called "a limit"), subject to
availability of sufficient security with the bank. For "security" please refer to the
following section on "banking terms". It is a facility in which the customer can cancel
the previous debit balance (amount withdrawn) by subsequent credits (amount
deposited) and draw afresh as and when required, subject to a limit. In case the
overdraft is given to business enterprises, it is for day-to-day operations, which is
otherwise known as “working capital”.
2. Cash Credit – A credit facility under which a customer draws up to a pre-set limit,
subject to availability of sufficient security with the bank. The difference between
an Overdraft and a Cash Credit account is that while the former is extended more to
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individuals and less for business, the latter is extended only to business bodies. The
Cash Credit facility is unique to India, as in most of the countries it is called
"Overdraft". Further, the cash credit facility is more or less on a permanent basis so
long as the business is going on. Internationally, at the end of a specific period, the
overdraft facility is withdrawn and the customer is required to pay back the amount
lent by the bank. The purpose of cash credit is for working capital. The operations are
similar to Overdraft.
3. Loan – A lump sum amount given to the customer, either in one "tranche" or in two or
three "tranches" and repayment over a period of time in monthly or quarterly or half-
yearly or annual (very rarely) instalments. Interest may be recovered separately from
the customer who is called "borrower" or combined with the instalment. In case it is
combined with the instalment, it is known as “equated” instalment. If interest is
recovered separately, it is usually on a quarterly basis, while instalment can be as
mentioned above. Loan is very common abroad and given against specific assets like
consumer durable, white goods, house property etc. Given to individuals as well as
business bodies. Loans against property and for the purpose of owning
flats/apartments/houses are known as "mortgage" loans.
Repayment period: Anywhere between 2 years to 5 years for other than housing loan.
For housing loan, in India, between 10-15 years and abroad, it can be even up to 30
years. Withdrawal facility by cheque is not available unlike Overdraft or Cash Credit.
BANKING TERMS OFTEN USED/ COMMON BANKING PRACTICES
1. Bill – usually mistaken for a commercial invoice. Actually bill in the banking parlance
means a Bill of Exchange drawn by a seller on the buyer whenever he sells goods or
services on "payment later" basis. Such a transaction is referred to as a "credit"
transaction. The bill is routed through the bank for collection of amount from the
buyer. Commercial invoice is a part of the documents submitted to a bank by the seller.
A Bill of Exchange is an order made to the buyer by the seller that in exchange for
the goods or services sold by him on credit, the buyer is required to pay on a specific
date, a certain amount with or without interest to him or to any other directed
party (mostly a bank).
2. Discount – less than face value. If the value of the bill is $100 and in case the bank
gives finance against the same, the amount of finance will be less than $ 100, say $ 98.
$ 98 is the discounted value of the bill for $ 100, while the difference of $ 2, is
known as “discount”. Discount is nothing but interest recovered up front, especially in
the case of those bills for which payment will be forthcoming after a specific or
expected period.
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3. Remittance – A facility, by which funds are made available to the bank by its customer
at one place and the bank in exchange, makes the funds available to the customer or
any other specified party at the required place, within the same country or abroad.
There is more than one mode of remittance. It can be by Demand Draft (DD), Mail
Transfer (MT), Telegraphic Transfer (TT), Electronic Mail Transfer (EMT) through
computer networking (or through satellite channel), International Money Order (IMO)
etc.
4. Letter of credit – Seller “A” enters into contract with Buyer “B”. One of the terms of
supply is that buyer will establish a letter of credit in favour of the seller through his
bank. The Buyer approaches his bank, which, on certain conditions, agrees to extend
this facility. Under this facility, the buyer’s bank gives commitment of payment to the
seller through his bank. The commitment is dependent upon the seller fulfilling specific
conditions as per the L/C. The conditions are:
 the seller should furnish proof of despatch of goods or services and
 submit all the documents required under the L/C.
Then, the buyer’s bank will pay the amount of the bill drawn by the seller on the buyer
under this arrangement. International letters of credit are by and large, “irrevocable”
(cannot be cancelled by the buyer without the consent from the seller)
Advantage – This facilitates global commerce through the banking channel which acts
as the financial intermediary and based on the letter of credit established by the
buyer’s bank, the seller’s bank will extend financial assistance to the seller till he gets
the payment from the buyer’s bank.
Bill of exchange v. promissory note – BOE is an unconditional order to pay while
promissory note is an unconditional undertaking to pay.
5. Bank guarantee – Could be a finance guarantee or a performance guarantee. Under

finance guarantee, the bank guarantees the beneficiary (the person named in the
guarantee to receive the guaranteed sum under stated circumstances), certain amount
on behalf of its customer who has commercial relationship with the beneficiary. Under
performance guarantee, the bank guarantees performance of a contract or
goods/services supplied under a contract by its customer. However, even in the latter
case, if its customer fails to deliver, it settles the claim of the beneficiary in money
terms only; the bank does not fulfil the contract obligation of its customer.
Example of Finance guarantee - Two parties enter into a contract. One is the supplier
and the other is the buyer. The terms of supply include 25% of advance to be given by
the buyer. The buyer wants assurance of supply as per the contract with the seller.
Hence he insists on a bank guarantee by the seller’s bank. The seller’s bank gives the
same against some security given by the seller. In case the seller does not fulfil the
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contract, the beneficiary of the guarantee lodges a claim with the guarantee-issuing
bank. The bank then pays the buyer the assured sum.
Example of Performance guarantee

Similarly, in the case of an export contract, the foreign buyer, who is the importer
may insist upon the seller’s bank issuing a performance guarantee to ensure that the
seller sticks to the delivery schedule. The buyer will establish a letter of credit in
favour of the seller through his bank only upon the buyer’s bank receiving the required
performance guarantee from the seller’s bank.
Lodging a claim under a guarantee with the guarantee-issuing bank by the beneficiary
is known as "invocation" of a guarantee.
Cancellation of a guarantee is known as "revocation" of a guarantee.
Letters of credit and bank guarantees play a very important role in international
banking.
6. Negotiation – the term refers to the act of a bank extending finance to the seller
against a letter of credit in his favour, once he furnishes proof of despatch and fulfils
all conditions of the letter of credit, as laid down by the buyer. The conditions relate
only to documents and not goods.
7. Cash Reserve Ratio – Called in short, CRR. It is in operation in India. Usually, in

developed countries, CRR and SLR (refer to the next point) are not separately levied.
They are together known as "statutory reserve". Suppose a bank has total deposits of
$100 Bn. and is required to maintain a CRR of say 5%. This means that the bank should
maintain in current accounts with the Central Bank or any other approved bank
balances, not less than $ 5 Bn. This much amount is impounded and kept in the free
form and the bank cannot lend this money. This acts as a buffer to the bank. In
India, RBI decides from time to time and at present it is 8.5% of the deposits held by
the bank.
8. Statutory Reserve Ratio – Called in short, SLR. In the above example, suppose the
bank is supposed to maintain SLR of 15%. This means that over and above CRR, the
bank is expected to keep aside an amount of $ 15 Bn. This will be kept in easy-to-
encash securities like treasury bills of the Government of USA and any other approved
securities. Here again, the Central Banking Authority in USA, i.e., the Federal Bank,
decides the ratio. In India, at present it is 25%. This again acts as buffer to the
bank and prevents the bank from lending the entire amount of deposits kept with it by
various customers.
Note pertaining to Reserve Ratio – the investment decision is taken not at the branch
level. It is taken at the Head Office of the bank. In India, the department handling
this, is known as "Treasury" department at the Head Office. This is natural, as this
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outfit is in touch with the market constantly. Further, compliance with SLR is to be
done on the basis of deposits of the bank with all its branches and hence the Head
Office is suitable for this purpose. The Head Office reports the position of deposits
as well as investment under CRR/SLR to the Central Banking Authority once in a
fortnight.
9. Credit to a customer’s account – Whenever any amount is received by the bank on

behalf of its customer, it posts the amount in the credit column of its ledger account
of the customer and enhances the balance in the account if it is a deposit account and
reduces the balance in the account if it is a loan account or overdraft account.
10. Debit to a customer’s account – Whenever any amount is paid by the bank on behalf of
its customer, it posts the amount in the debit column of its ledger account of the
customer and reduces the balance in the account if it is a deposit account and
enhances the balance in the account if it is a loan account or overdraft account.
11. Clearing operation – Suppose Customer “A” has his check account with Bank of New
York, New York Branch (B.O.N.Y., N.Y.). He issues a cheque in favour of “B” who is a
customer of Chemical Bank, New York Branch (C.B., N.Y.). “B” deposits the check in his
account with C.B., N.Y., which presents the check to B.O.N.Y., N.Y. through a platform
known as “clearing house”. The Federal Bank or its authorised bank in all the major
centres mostly conducts this across the US.
12. B.O.N.Y., N.Y. credits C.B., N.Y. with the amount of the check after debiting the same
to its customer “A” and on receipt of clearing advice, C.B., N.Y. debits B.O.N.Y., N.Y.
and credits the account of Customer “B”. Thus clearing operations enable the banks to
exchange instruments such as checks, international money orders, bank drafts etc.
drawn on one another but within the same clearing zone and not outside it. If the
instrument is drawn outside the clearing zone, the bank sends the instrument for
collection, which takes a little more time than clearing.
13. Daily product basis – This is the basis on which interest is usually determined on credit
facilities, like loan, overdraft, cash credit etc. For this, the basis is 365 days in a
year. Some banks do take 360 days in a year also. There is no hard and fast rule in
this behalf. For example Barclays Bank has given a customer an overdraft facility to
the extent of $ 10000 for 45 days at 6% p.a. On a daily product basis, the interest is
determined as under:
Step No. 1 – 10000 x 45 days = known as product = 450,000
Step No. 2 – determination of annual average as rate of interest is on annual basis, i.e.,
450,000/365 = $ 1233. This means that on a 365 days per year basis, drawing $
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10000 for 45 days is equivalent to drawing $ 1233 through out the year, i.e., on annual
basis.
Step No. 3 – calculation of interest at 6% p.a. = 1233 x 0.06 = $ 73.98
This means that by adopting daily product basis we are converting the amount drawn
for a period less than a year to its annual equivalent so that the rate of interest, which
is universally on annual basis, can be applied to determine the quantum of interest.
One may ask, why this indirect method when all the above three steps can be combined
into one? The answer is yes. The utility of daily product basis lies in determining the
annual equivalent in cases wherein the amount drawn is likely to differ every now and
then, like in the case of overdraft or cash credit. Refer to Specimen 1 for detailed
calculation of interest on daily product basis in an overdraft account, in which balances
differ every now and then.
Besides credit facilities, this is the method adopted by most of the US Banks for
giving interest on current account balances also. For other deposit accounts, which are
fixed in nature, yearly interest is straight away applied.
14. Monthly product basis – Suppose as in the case of India, in the savings account, the
product is taken on a monthly basis. In India, the rule is interest is paid on the
minimum balance in the account between the 10th and the last day of every month. This
means that any credit to the account after the 10th of the month is ignored for the
particular month, while debit is taken into account. Accordingly let us say for example
the following minimum credit balances existed in a savings account earning 2% p.a.
interest in the US.
January 99 - $ 100
February 99 - $ 80
March 99 - $ 150
April 99 - $ 250
May 99 - $ 300
June 99 - $ 30
Total of the above = $ 910
Suppose the interest is payable every half-year and accordingly this customer will be
entitled to 1% for the half-year ending June 1999. In order to determine the correct
half-yearly interest, the sum of the monthly products is divided by 12 to find out
annual equivalent of the deposit, that the customer has kept in his savings account at
2% p.a. interest. The annual equivalent amount is $ 75.83 and the interest at 2% p.a.
for the half-year on this works out to $ 1.52. This is the way interest is found out on
a monthly product basis.
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15. Premature withdrawal of fixed deposit – Even though fixed deposit is a contract
between two parties, banks usually allow premature withdrawal, i.e., withdrawal before
maturity date. However, there will be penalty for premature withdrawal in the form
of reduced interest. Suppose rate of interest is 6% p.a. for a three-year deposit and
the depositor wants withdrawal after a year. The rate of interest relevant for this
deposit is the one-year rate as the deposit has been kept only for one year. Suppose
the rate of interest for one year is 5% p.a. The penalty may range between 1% to 2%
and everything is bank dependent.
Some of the banks may not levy any penalty. Hence instead of paying interest at
contract rate, interest will be paid at a rate as applicable to the period for which the
deposit has been kept with the bank. This is okay so long as the deposit is on
cumulative basis. On the other hand, in case the deposit is on a periodic payment
basis, interest would already have been paid at the contract rate and the excess
interest, if any, needs adjustment at the time of withdrawal. An example –
Amount of deposit - $ 10000

Contract period – 2 years
Rate of interest – 6% p.a.
Compounded annually in case interest is paid on maturity
Request for payment after 1 year
Relevant rate of interest for 1 year period – 5%p.a.
♦ Alternative 1
No penalty and relevant rate of interest is 5% p.a.
Interest payable on maturity and no interest has been paid
Amount payable on maturity on annual compounding of interest
$ 10000 x 1.05 = $ 10,500
♦ Alternative 2
No penalty and rate of interest is 5% p.a.
Interest payable half-yearly and hence no compounding
Half-yearly interest paid at contract rate of 6% p.a. for the first half-year = $ 300
Total interest payable for the period of deposit at 5% p.a. = $ 500
Total amount payable including interest for the entire period = $ 10500
Less interest already paid = $ 300
Amount now payable = $ 10200
♦ Alternative 3
Penalty of 1% and rate of interest for one year deposit = 5% p.a.
Interest payable on maturity and no interest has been paid
Amount payable on maturity = $ 10000 x 1.04 = $ 10400
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♦ Alternative 4
Penalty of 1% and rate of interest is 5% p.a.
Interest payable half-yearly and hence no compounding
Half-yearly interest paid at contract rate of 6% p.a. for the first half-year = $ 300
Total interest payable for the period of deposit at 4% p.a. = $ 400
Total amount payable including interest for the entire period = $ 10400
Less interest already paid = $ 300
Amount now payable = $ 10100
Note – In case the contract for deposit is for 5 years and the request for premature
withdrawal is after 2 years and if the deposit is on regular payment of interest basis,
it may so happen that excess interest paid as per contract rate, upon adjustment, may
even reduce the principal amount. The amount to be adjusted depends upon the
following factors:
♦ Whether there is any penalty involved for premature withdrawal?

♦ What is the term for payment of interest, i.e., on a cumulative basis or on periodic
payment basis?
♦ What is the periodicity of compounding, i.e., monthly, quarterly, semi-annually or
annually?
16. Repayment holiday – Whenever a loan is taken especially for acquiring fixed assets, the
repayment does not start immediately. It starts after the fixed asset starts giving a
return especially in the case of business enterprises. This is not so in the case of
personal loans. The period during which there is no repayment is known as “repayment
holiday period”. This is also known as “Moratorium period”. This period is longer in the
case of industrial loans and minimum or absent in the case of personal loans. It should
be noted that during this period, interest is charged and there is no period for non-
levy of interest, although there may be a period of non-recovery of interest, i.e.,
interest, although levied not recovered for a specific period. Again if this is the case,
interest on interest is recovered.
17. Credit instruments – Any instrument that is drawn on a bank, against surrender of
which the concerned bank will pay us the amount mentioned in the instrument.
Examples – checks, drafts, mail transfers, travellers’ checks, international money
orders etc.
18. Negotiable instruments – All the credit instruments that are transferable from one
person to another by a process known as “endorsement” are called “negotiable”
instruments. Suppose “A” is receiving payment by means of check from “C”. “A” owes
money to “B”. The check is a negotiable instrument as it enables “A” to settle his dues
to “B” by endorsing the same in favour of “B”. This renders the check a negotiable
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instrument. There may be some restriction on some of the above instruments, not
allowing free transferability either by the banks or by the issuers of the instruments
themselves.
19. NOSTRO Account – A current account which a bank has with another bank abroad,
which is usually its correspondent bank and the currency in which the balance is
maintained is foreign and not local. For example, CITI Bank, Baltimore has an account
with Barclays Bank, London, expressed in British Pounds. It is said to have a NOSTRO
Account with Barclays Bank in British Pounds. Thus, whenever we mention NOSTRO
Account, it is necessary for us to know with whom it is maintained and in which
currency. All the banks in India dealing in foreign exchange are required to maintain
NOSTRO Accounts abroad with different correspondent banks in different currencies
in different countries. In India at present, the RBI should know the names of
correspondent banks with which such accounts are being maintained.
♦ Further, payment for imports cannot be made in Indian Currency, as it is not fully
convertible – means that other than Indians and travellers coming to India, others do
not have any value for the Indian Rupee at this juncture. (The low exchange value of
Indian Rupee vis-à-vis US $ or any other foreign currency is quite different from this.
Even a currency whose unit value is less than that of Indian Rupee, say, Italian Lira is a
universal currency. These two are different phenomena.)
♦ Suppose Deutsche Software has account with Deutsche Bank, Bangalore. Deutsche
Bank, Bangalore has NOSTRO Account with Bank of America, Seattle. When the
export bill of Deutsche Software is routed through Deutsche Bank gets paid, Bank of
America, Seattle, credits Deutsche Bank's NOSTRO Account with it. Once this advice
is received, Deutsche Bank, Bangalore advises Deutsche Software and at the prevailing
exchange rate between US $ and the Indian Rupees, converts the amount of credit
(less their charges, if any) and credits the account of Deutsche Software with it.
♦ Similarly let us see an example for import payment. Suppose Deutsche Software
imports a testing kit from UK. The bill is raised in British Pounds. The bill will be
routed through Deutsche Bank, Bangalore. Deutsche Bank, in order to settle this bill in
British Pounds has to have a British Pound NOSTRO Account with a British Bank. Let
us assume that it has with Standard Chartered Bank, London. Upon receiving debit
instructions from Deutsche Bank, Bangalore, Standard Chartered Bank, London, debits
its NOSTRO British Pound Account and credits the bank of the exporter with the
same amount.
Thus we see whenever export payment is received NOSTRO Account is credited

and whenever import payment is made NOSTRO Account is debited.
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♦ Note – Standard Chartered Bank, London is referred to as "Correspondent Bank" for
Deutsche Bank, Bangalore. The current account that is maintained by Deutsche Bank
with it in British Pounds is called a NOSTRO Account. Correspondent banks work on
mutual arrangement basis. This is to say that while Standard Chartered, London, UK is
the correspondent bank for Deutsche Bank, Bangalore, it will in turn be the
Correspondent Bank for Standard Chartered, London, UK.
20. VOSTRO Account – The NOSTRO Account of Deutsche Bank, Bangalore with Standard
Chartered, London, UK is a VOSTRO Account for Standard Chartered Bank, London, of
Deutsche Bank, Bangalore. In short for a correspondent bank, whichever account it is
holding on behalf of a foreign bank is its VOSTRO Account.
21. Foreign Exchange Reserves – These are primarily balances in the NOSTRO Accounts in
various currencies (converted into equivalent Dollars) of all the banks in India. There
are other constituents of the Foreign Exchange Reserves also, but the NOSTRO
Accounts balances constitute the major portion of the reserves.
22. Acceptance – We have seen what a Bill of Exchange is. The buyer who has already
received goods or services from the seller is required to acknowledge his debt to the
seller by signing on the Bill of Exchange. This act of acknowledgement is called
“acceptance”. At times in this, banks are also involved just to enhance the credibility
of a bill of exchange. This is called banker's acceptance for which the bank charges
commission. It is similar to giving bank guarantee.
23. Credit Report – It is called by different names. At times, it is referred to as “Credit

Information Report”. At other times, it is also called “Customer’s confidential report”.
Banker’s report also means the same. With the growth of commerce within a country
and abroad, most of the times, trade is done with organisations, about which you are in
the dark. The banker provides good platform for knowing something about the
business enterprise with which you are likely to deal. There are accepted
abbreviations internationally for denoting the soundness or the lack of it of a business
enterprise. These abbreviations are commonly used in such reports. You can seek
confidential information about your prospective customers about whom you do not have
sufficient knowledge. The banker provides this information for a fee, which includes
the fees that they have to remit to International Credit Agencies.
24. Syndication – Making arrangement for loans for borrowers. Should not be confused
with granting of loans. The bank may or may not participate in the loan process, but
would assume responsibility for getting “in principle” sanction from all the participating
banks and financial institutions. It is more common internationally and syndication
fees are quite substantial abroad. Syndication fees are part of non-interest income as
no funds are involved in the activity. For example an Indian company wants a Foreign
Currency Loan of 100 M. $. Making arrangement for this is called syndication. Even if
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the arranging bank participates in the loan by granting a portion of it, syndication is
different from it. It gets paid separately for this activity.
25. Depository – Depository for securities, i.e., shares/bonds etc. For this fees are
charged, which is a non-interest income.
26. Custodial services - As per instructions of the customers, accepting dividend and
interest warrants on shares and bonds/debentures respectively and credit the
proceeds of the same to the customer’s account. For this also separately fees are
charged, which is a non-interest income.
27. Charges in a letter of credit –

♦ Letter of credit opening charges which depend upon the period for which
the L/C will be valid
♦ L/C advising charges to be paid to the advising bank, which will mostly be
the correspondent bank
♦ L/C confirmation charges to be paid to the confirming foreign bank
♦ L/C negotiation charges to be paid to the bank which is negotiating, which
will mostly be the correspondent bank
♦ L/C amendment charges payable to the L/C opening bank whenever any term
of the L/C is changed.
28. Charges in a bill

♦ Commission for collection and recovery of postage/courier charges. Both of
these together are known as “handling charges”.
♦ Interest or discount in case bank finance is given to the customer against
the bill.
29. Charges in a loan account

♦ Processing fees for processing the application of the borrower which is ad-
valorem, i.e., depending upon the amount of loan
♦ Documentation and legal fees for preparation of documents and fees paid to
firm of solicitors, if any.
♦ Credit Management fee
♦ Annual fees recovered at the time of renewal of the limits every year
30. Security - Fixed assets like land, building, plant and machinery etc. as well as working
capital assets like inventory or bills receivable are offered as security to a lender by a
borrower for assurance of repayment of the loan taken by him. Suppose it is a housing
loan. The value of the apartment is $30000. This is the value of security for the
mortgage loan. The bank would give loan to the extent of certain prescribed % of the
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value of the security. Security can be paper security like shares, debentures, fixed
deposit receipts, life insurance policies etc.
31. Margin – This is expressed in % of the value of security. In the above example,
suppose the margin is 25%, it means that the housing loan would be to the extent of $
22500. At times the margin is also expressed as the amount of loan in % terms to the
value of security. Accordingly the margin would work out to be 75% in this case. This
should be borne in mind while preparing the programme for a bank.
32. Foreign exchange – It is one of the most important aspects of international banking, as
a result of the different currency systems in the two countries involved. For example
an American company imports from France and the bill is in French Francs. It is
obvious that the exporter wants French Francs in France. Where does the American
importer get the French Francs from? He gets it from the banking system. He
exchanges US $ for French Francs. In fact the importer need not possess French
Francs at all. It is enough he surrenders US $ to his bank in the US and in exchange
for the same, the US bank will give equivalent French Francs to the French exporter in
France. This transaction will be through its NOSTRO Account as seen earlier,
maintained with a correspondent bank in France.
Then the question comes as to who decides at what rate the exchange should take
place. In a country like the USA, it is an open market system and hence the foreign
exchange market decides the exchange rate between the French Franc (F.F.) and the
US Dollar. The Foreign Exchange Market is a perfect market influenced by demand
and supply. The market as soon as it opens in the morning starts giving quotations for
all the major currencies in the world. The quotation will be a two-way quote – one price
for purchase and the other purchase for sale. The purchase price has to be less than
sale price. Foreign Exchange is like any other commodity. "Buy low" (at a lower price)
and "sell high" (at a higher price) is the motto of this market.
For example, in the above case, 1 US $ = F.F. 7.818
This does not give a true picture, as it is not a two-way quote. The correct way to
quote will be 1 US $ = F.F. 7.818/7.808. This quotation is known as bid/offer quote,
thereby meaning that the former is the rate at which the bank will purchase F.F. from
the market ("buy more" in quantity) and the latter is the rate at which the bank will
sell F.F. to a buyer ("sell less" in quantity). In our case, as import is involved, the
relevant rate is 1 US $ = F.F. 7.808. The difference between bid/offer rates is called
as "the margin" or "spread" for the bank, representing his profit in the transaction.
In this case, since the bank is purchasing F.F. the motto should be buy higher quantity
of foreign currency for one unit of home currency (i.e., US $) and sell less quantity of
foreign currency for one unit of home currency.
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♦ “Bid” means the bank wants to purchase.
♦ “Offer” means the bank wants to sell.
Thus in the case of any international trade, foreign exchange is involved and one
currency gets converted into another currency at the market determined rates, in
most of the developed countries. This may not be so in the case of “developing”
markets like India. Developing markets in general and some of the developed markets
too adopt a policy, which enables the Government or the Central Banking Authority of
the country to monitor this market and intervene, if necessary. The international
foreign exchange market every day transacts in trillions of dollars. Out of this volume
more than 90% is for speculation and not backed by trade of services or goods. In
India, speculation in foreign exchange market is not permitted. Even banks dealing in
foreign exchange have some limits (periodically set by the RBI), up to which only, they
can hold balances in permitted foreign currency/currencies, without the backing of
commercial transactions with its customers.
♦ Different types of quotations in the foreign exchange market depending upon the
period of transaction:
♦ A rate quoted today is for transaction to be put through at the end of 48 Hours.
Hence this is called “spot rate”.
♦ A rate quoted for transaction within 24 hours is known as “TOM”, acronym for
“Tomorrow”
♦ A rate quoted for transaction to be done immediately is known as “Cash” transaction
♦ A rate quoted for transaction beyond 2 days is known as “forward rate” and a contract
is entered into with the buyer of the foreign exchange/the seller of the foreign
exchange. In the case of import, we happen to buy the foreign exchange and in the
case of export, we happen to sell foreign exchange. This contract is known as "forward
contract".
We will see some examples to familiarise ourselves with these terms and appreciate
the effect of different trends in the forward rates on importer and exporter.
Example Spot rate for US$ in terms of French Franc, 1 US $ = FF 7.818/7.808

Forward rate for transaction 1 month hence, 1 US $ = F.F. 7.808/7.796
This means that with the passage of time you are getting less F.F. for US $. This
indicates that foreign currency is becoming dearer (costlier) vis-à-vis US $.
What is the impact on an importer in the USA?

This is not favourable for an importer in F.F., as he will be required to fork out more
US $ for the same quantum of F.F. than in the past.
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Then, what happens to an exporter from the USA in case the invoice is in US Dollars?
This will not affect him as he is getting the quantum of US Dollars as per his invoice.
However, the importer in France will be benefited, as he will require less amount of FF
to pay for the import bill, as FF has increased in value vis-à-vis US Dollar.
What will be the scenario if the forward rate is 1 US $ = F.F. 7.828/7.818?

This means that F.F. is becoming cheaper vis-à-vis US $. So, in the case of import in
FF, the effect will be the opposite. The US importer will be benefited. The case of
the US exporter will be the same as in the previous case. The US exporter will be
affected only if the export done by him is in FF. Raising invoice for export from the
US in a currency other than US Dollar is permitted by the US Federal Bank.
Thus it is seen that whenever you are exporting in a foreign currency you are
benefited in case the foreign currency is becoming stronger and similarly whenever
you are importing in a foreign currency you are benefited in case the home
currency is becoming stronger.
The quotations in the foreign exchange market depend upon the type of transaction.
This aspect is examined in the following paragraphs.
For example a simple remittance in F.F. will get a better quote than a quote for an
import bill, as the bank is required to handle the documents in the case of an import
bill. Similarly in the case of an export bill, a simple remittance will get better rate in
comparison with an export bill. Let us see the following examples.
Spot rate 1 US = F.F. 7.818/7.808

Let us assume that this rate is for simple remittance. Then for a bill transaction, the
quote will be somewhat on the following lines.
1 US $ = F.F. 7.821/7.805. The analysis for this quote is as under:
For a simple remittance in F.F. into the US, the bank is prepared to give you US $ at
the rate of 1 US $ = F.F. 7.818. This is called T.T. Buying quote.
For remittance of an export bill in F.F. into the US, the bank is prepared to give you
US $ at the rate of 1 US $ = F.F.7.821, which means that you will get less US $. This
is called Bill Buying quote or BC buying quote.
Similarly for a simple remittance in F.F. (outward) from the US, the bank is prepared
to sell F.F. at the rate of 1 US $ = F.F. 7.808. This is called T.T. Selling quote.
For an import bill in F.F. the bank is prepared to sell F.F. at the rate of 1 US $ = F.F.
7.805 less F.F. than for a simple remittance. This means that for a given amount of
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F.F. you will be required to shell out more US $. This is called Bill Selling quote or BC
selling quote.
Note – We will appreciate the above examples provided we keep the following in mind:
The US importer has US $ which he exchanges with the bank for acquiring F.F. to pay
for import from France. Similarly in case the US exporter has raised invoice in FF, he
acquires F.F. from the importer, at least abroad and does not have any use for the
same in the US. Hence he wants to exchange it for the US $ which is the home
currency. The examples can be better understood with a fictitious F.F. amount of
10000. (Please do this exercise for absorbing the fundamental difference between a
foreign exchange quotation for ordinary remittance and that for a bill transaction)
In India, there is restriction on holding foreign currency assets. Companies and

individuals are not permitted to hold foreign currency assets. The banks are
permitted, as this is necessary for international trade. Selected Indian companies
(depending upon their requirement and nature of business - for example, a software
company operating in India and doing software export will be required to hold foreign
currency deposit.) Hence RBI gives permission to such companies to have their own
NOSTRO accounts abroad. Individuals are not permitted at present. (Do not confuse
with non-resident Indians’ deposits, as they are not resident Indians).
As against this, in the US, even the individuals are permitted to hold foreign currency
deposits with the permission of the Federal Bank through their individual banks. Hence
in the instant case, the exporter earning F.F. may not feel the need to convert his F.F.
earning into Indian Rupees, especially if he knows that F.F. is going to appreciate in the
near future, thereby enabling him to earn more US $ for the same amount of F.F.
33. Securitisation
This is the process whereby traditional bank assets, namely, mortgages are sold by the
bank to a trust or a corporation, which in turn sells the assets as securities. This is
very reliable way of raising resources for the banks and this concept is catching up
well internationally.
INTERNATIONAL TRADE GLOSSARY – EXCLUDING TERMS ALREADY EXPLAINED

ABOVE
Acceptance
A bill of exchange on the face of which the drawee has written the word “Accepted” over
his signature. The date and place payable are usually indicated (Specimen 1)
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Acceptor
The person to whom the Bill is addressed and who shows his assent by signing his name
across the Bill indicating that he will pay the bill on maturity. (Specimen 2)
Advance against collection

Provide funds to an exporter by purchasing his collection documents with recourse to him
should the collection not get paid
Advising Bank
The bank, which advises the beneficiary that another bank, has opened a letter of credit.
Has no obligation or responsibility, but will probably authenticate and ensure compliance
with local regulations before passing on to the beneficiary.
Air Way Bill (AWB)

A receipt for goods sent by air. Also a contract of carriage of goods. It is a part of
international trade and the documents submitted to the seller’s bank, after despatch of
goods. The goods will be handed to the consignee who is named in the AWB against
identification only.
Amendment
The terms of a letter of credit can be changed by amendment provided all parties agree.
Back to Back
A letter of credit (L/C) has been opened by a bank in favour of a trader (frequently a
middleman) covering certain goods. On the strength and security of this L/C, another
bank opens a separate L/C on behalf of the trader in favour of the supplier of goods.
Such an arrangement may be described as a Back to Back Credit.
Bank Acceptance
A Bill of Exchange drawn on and accepted by a bank.
Beneficiary
The party in whose favour a Letter of Credit is opened – normally the seller.
Bid Bond
Supports a tender for a contract, guaranteeing compensation should the bidder win the
contract but fail to sign it.
Bill of Lading
A receipt issued by an ocean carrier for merchandise to be delivered to a person at some
distant point. It is also evidence of a contract of carriage. Unlike in the case of AWB the
bill of lading can be endorsed in some one else’s favour, unless this is restricted.
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Carrier
The transport company (shipping company, airline etc.) carrying the goods from one
destination to another destination.
Certificate of origin
A certificate issued by the proper authorities, e.g., a Chamber of Commerce, which
accompanies the documents covering the shipment of goods. The certificate usually
specifies the origin of material or labour used in the production of such merchandise.
Clean Bill of Lading

A term defining a bill of lading when the transportation company has not noted any
irregularities in packing, general condition etc. of all or any part of the shipment.
Clean Credit
A letter of credit, which is available to the beneficiary against presentation of only a bill
of exchange duly, accepted by the buyer and/or receipt for goods issued by the buyer.
This is rare. It means that the buyer has received the goods and hence no transport
document like AWB or Bill of Lading is present.
Collecting Bank
In the collection process, the bank in the vicinity of the drawee responsible for making
presentation and collection proceeds.
Commercial Invoice
An invoice of the seller of the goods or services, addressed to the buyer giving a
description of the goods, quantity, rate, charges, if any etc.
Confirming Bank
The bank, which adds its confirmation to the Irrevocable Letter of Credit of another
bank, thereby adding its own guarantee that payment will be made by the L/C issuing bank.
Protects against failure of L/C establishing bank to meet payment obligations.
C.I.F.
Part of “INCO” terms. “INCO” is an acronym for “International Commercial”. This is one
of the terms of supply in international trade. Means Cost, Insurance and Freight charges
are included in the commercial invoice.
C. & F.
Cost and Freight. Insurance is not included in the value of the invoice. It is the
responsibility of the buyer.
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C.F.S.
Containerised Freight Service – Another INCO Term. This means that till the
consignment reaches the specified Containerised Services Depot, all the charges are
included in the cost and from the Containerised Services Depot, the charges will accrue
and the consignment is the responsibility of the drawees from that point.
Deferred Payment Credit

A credit giving the buyer a specified time in which to pay after presentation of
documents, but without a bill of exchange. The seller should not be at a disadvantage for
discounting his bills. Hence, wherever this is extended, it is backed by a bank guarantee.
On the basis of the bank guarantee, bank finance is obtained.
Documentary credit
A letter of credit, which is available to the beneficiary against presentation of a draft
and certain specified documents.
Documents against Acceptance

An indication on the bill of exchange that the documents attached are to be released to
the drawees upon acceptance of the bill of exchange.
Documents against payment

An indication on the bill of exchange that the documents attached are to be released to
the drawees upon payment only.
Drawee
The person on whom the bill of exchange is drawn, usually the buyer of goods or services.
When he signs on the bill of exchange in acceptance of his liability to the seller of goods
or services, he is called an “acceptor”.
Drawer
The person who draws the bill of exchange, usually the supplier of goods or services,
thereby giving an order to the drawee to pay the amount of the bill to himself (drawer) or
to the directed person on the specified date.
Endorsement
A signature on the reverse of a negotiable instrument made primarily for the purpose of
transferring the rights of the holder to another. It is a contract between the holder and
all parties to the instrument. Each endorser orders the prior parties to fulfil the
contract to his endorsee. He also agrees with the endorsee that if they do not, he will.
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Expiry Date
The final date upon which drafts and documents under a letter of credit may be
presented for negotiation or payment. A latest shipment date may also be specified and a
time limit within which to present after shipment (21 days if not specified).
F.A.S.
Free Alongside Ship – another INCO Term. The supply price includes all costs till it
boards the ship. Even the cost of putting them on board is not included and the buyer is
responsible for it.
F.O.B.
Free on Board – another INCO Term. The supply price includes all costs including the
boarding charges to put the consignment on board. Once the consignment is on board, the
charges are to the buyer’s account and it is his responsibility.
Freight paid/collect
A bill of lading will state whether freight has been paid or is to be collected. The shipping
line has a lien on the goods until freight has been paid.
Holder
The holder who is in possession of a bill, who may either be the payee, an endorser, or the
bearer.
Holder for value

A person who holds a bill for which value has at some time been given though not
necessarily by the holder himself.
Hypothecation
Making over or assigning to lenders, as security, goods or documents of title thereto, by
written agreement, creating a lien on the goods in favour of the lender.
Maturity Date
The date on which an accepted bill of exchange becomes due for payment.
Open Account
An arrangement whereby a seller ships goods trusting his buyer to pay in due course,
without the protection of a bank.
Performance Bond
A bond supplied by one party to another, protecting the party against loss in the event of
improper performance or completion of the terms of an existing contract.
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Presentation
A legal term used in connection with negotiable instruments. The act of presentation
technically means the actual delivery of a negotiable instrument by a holder in due course
to the drawee for acceptance, or the maker for payment.
Rebate
An allowance, calculated at a rate of interest agreed for the purpose, made to the
acceptor of a bill or to the person for whose account a bill has been accepted, when he
puts up the money to meet the bill before its maturity date.
Red Clause Letter of Credit

A letter of credit which authorises advances to the beneficiary before shipment and,
therefore, before bills of lading can be lodged with the negotiating bank. These advances
together with interest are liquidated from the proceeds of negotiation of the bill, which
is drawn under the Credit when the Bill of Lading is available.
Rediscount
When the bank which finances a bill on discount basis, sells the bill to a third party, he is
said to get the bill rediscounted.
Revolving Credit
A letter of credit issued for a specific amount, which renews itself for the same amount
over a given period. Usually the unused renewable portion of the credit is cumulative, so
long as drafts are drawn before the expiration of the credit.
Sight Draft
A bill of exchange payable on presentation to the drawees. This means that there is no
credit period involved in the supply of goods or services.
Shipper
The exporter/seller whose goods are being shipped. Not the shipping company, which is
referred to as the carrier.
Standby Credit
A letter of credit that is only used by the beneficiary if the opener fails to meet a
specified obligation.
Stale
A bill of lading is termed stale if there is insufficient time to get it to the consignee
before the expected arrival of the vessel.
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Tenor
The period of time, as stated or indicated on the bill, for which a bill is drawn to run
before it matures. For example "At sight”; or “At 90 days after sight”; or “Three months
after date”; or “on 30th June, fixed”.
Time Draft
A Bill of Exchange, drawn to mature at a certain fixed time after presentation or
acceptance. A Bill of Exchange drawn to mature on a fixed date, irrespective of the time
of acceptance, for example 90 days after date is often referred to as a “date draft”.
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International Banking
As mentioned in the introduction, international banking revolves around the following:

♦ international trade
♦ tourism,
♦ remittance of funds from one place to another place,
♦ syndication of loans globally for large business houses and multinationals,
♦ accessing international markets for equity/borrowing in the form of bonds etc. for
corporate houses/multinationals
♦ Foreign exchange management etc.
The above give rise to the following transactions:
INTERNATIONAL TRADE
♦ Letters of Credit,
♦ International Guarantees like performance guarantee, advance
♦ Money guarantee etc.
♦ Deferred Payment Credit backed by bank guarantee
♦ Bills for collection
♦ Foreign exchange involved in remittance of proceeds from the
importing country to the exporting country
TOURISM -
♦ International Travellers’ checks

♦ International Money Orders
♦ Foreign exchange involved in encashment of travellers’ checks
and International Money Orders/Demand Drafts/Telegraphic Transfer/SWIFT
remittance etc.
♦ Credit card business and international bills settlement under credit cards
REMITTANCE OF FUNDS FROM ONE PLACE TO ANOTHER PLACE BESIDES

TOURISM/INTERNATIONAL TRADE
♦ Routine transfer from persons employed abroad

♦ Donations/charity remittances
♦ Remittances for disbursement of loans (inward for the borrowing country)
♦ Remittances for repayment of loans (outward for the borrowing country)
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♦ Remittance for payment of interest (outward for the borrowing country)
♦ Remittance of royalty, dividend (outward for remitting country)
SYNDICATION OF LOANS GLOBALLY FOR CORPORATE HOUSES
♦ This does not involve any funds and it is a non-fund based activity earning non-interest
income
ACCESSING INTERNATIONAL MARKET FOR EQUITY/BORROWING IN THE FORM OF

ADR/GDR AND EURO BONDS ETC.
♦ This again does not involve any funds and it is a non-fund based activity earning non-
interest income
FOREIGN EXCHANGE MANAGEMENT
♦ This is common to all the activities listed above, which involve funds. Such activities
are called fund-based activities of the bank, unlike syndication and/or accessing
international markets for GDR/ADR, Euro bonds etc., which are non-fund-based
activities.
Note: A discussion about international banking is not complete without mention of

electronic cash on the Internet or “E-cash”. This could easily become global currency,
issued by Governments and private firms alike. The explosive growth of this phenomenon
will tremendously influence globally the banking industry and hence everybody in the
banking industry is watching this development with interest, awe and fear, all at the same
time.
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Profile of a bank
DIFFERENT LAYERS OF BANKING OPERATIONS IN INDIA IN GENERAL
Branch banking – This is the operating unit of a bank - a place wherein all the operations
of a branch take place, both retail and wholesale. This is the place for operations and not
for bank administration, although branch administration is a part of branch operations. A
branch is responsible to itself and does not control another branch.
Bank administrative units which control branches within its territory/jurisdiction – These
are at different levels, the first level being a Regional Office or a Divisional Office or an
Area Office, the second level being a Zonal Office and the third and apex level being the
Head Office. These administrative units do not carry on any banking operations like
branches but monitor and control all the branches within its jurisdiction to ensure that
the functioning is smooth and as per the guidelines of the Bank as a whole and the Reserve
Bank of India (the country’s Central Banking Authority). Further in respect of decision
making, starting from the branch to Head Office, there are different levels with each
successive higher level having higher delegated powers than the previous level.
At the same time, we can easily visualise that among the operating units, i.e., branches, all
the branches may not be at the same level in terms of delegated powers. The extent of
powers enjoyed by a branch will depend upon its size, i.e., mix of deposits and advances at
its command etc. Small branches will enjoy less authority; medium sized branches enjoy
more authority, while large branches will enjoy maximum authority. The authority relates
to the extent of finance that they can give at their level without any reference to the
next higher level of authority (Regional Office or Zonal Office) or the highest level of
authority (Head Office).
The designation of the controlling offices differs from bank to bank and no uniform
practice is seen in India. The level of authority or extent of authority to be wielded by a
particular layer is decided by the Board of Directors who meet in the respective Head
Offices. The Board of Directors is headed by a Chairman and is assisted, most of the
times by an Executive Director. In turn, the Executive Director is assisted by General
Managers (some banks have additional posts called Chief General Manager, Deputy Chief
General Manager etc.), Deputy General Managers, Assistant General Managers, Zonal
Managers, Regional Managers, Branch Managers (at the branch level) etc. This is just to
give an overall view of the possible hierarchical structure within a bank in India and not
meant for giving the reader the organisation chart of a bank.
Most of the large size banks have an international banking department.
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WHAT ARE THE DUTIES OF AN INTERNATIONAL BANKING DEPARTMENT?
1. Exchange operations
2. Opening of documentary credits of importation as well as providing notices and
confirmation of export documentary credits.
3. Remittance to correspondents of documents for collection and handling of collection
received from them.
4. Issuing bond guarantees on foreign countries or issuing bonds or guaranties for the
account of foreign banks or firms in favour of local firms.
5. Handling foreign currency assets of the bank.
6. Granting lines of credit to banks or firms abroad and securing and handling lines of
credit granted to the bank by its correspondents.
7. Maintaining public relation to assure permanent contact, directly or indirectly, with
customers within the country or abroad.
8. Maintaining close supervision of relations with correspondent banks world-wide, which,
aside from credit and service aspects, also means permanent control over reciprocity
received or given.
9. Compiling statistical data to evaluate the evolution of bank operations in the
international sector.
TYPICAL DUTIES OF THE CHIEF DEALER OF FOREIGN EXCHANGE IN AN

INTERNATIONAL BANKING DEPARTMENT
1. Execute and supervise the bank’s purchases and sales of foreign currencies.
2. Provide all agencies and branches with duly buying and selling rates of different
currencies with which the bank normally deals.
3. Provide current quotes for those same currencies for all operations about which the
dealer or desk has been consulted.
4. Modify rates previously transmitted as well as suspend any authorisation given to
branches and agencies to operate freely up to certain limited amounts.
5. Maintain contact with principal bank customers about foreign exchange matters.
6. Review operations daily.
7. Watch for irregularities.
8. Monitor the foreign exchange position.
9. Supervise the foreign currency cash assets that the bank holds in its correspondent
banks abroad.
10. Carry out transfers or coverage transactions so that accounts abroad have the least
number of overdrafts thereby avoiding unnecessary interest charges.
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Banking Transactions/Flow chart of activity in a bank
Having examined the various aspects of banking organisation, let us now examine the
operations at the unit level, i.e., at the branch level.
DAILY ACTIVITIES IN A BRANCH
At start of Day
♦ Prepare office for routine work
♦ Close Previous day’s books of accounts
♦ Working cash to be retrieved from Vault and

Distributed to tellers
♦ Process remittances from other banks
♦ Get the applicable rates for the day –

Exchange rates, interest rates, changes in fees, service
Charges etc.
♦ Initiate the computer system
During the Day
♦ Handle mail from customers and process them
♦ Process customer transactions at the teller counter
♦ Execute standing instructions for customers
♦ Prepare statements of accounts for customers
♦ Perform tasks relating to Term Deposits/Loans
♦ Process cheques for inward and outward clearing

(Inward – cheques issued by various customers of the bank
on the branch and outward- cheques deposited by various
Customers of the bank drawn on other banks within the
same banking centre)
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DAILY ACTIVITIES IN A BRANCH (Contd.)
End of Day
♦ Balance cash, instruments
♦ Process vouchers to be sent for remittance
♦ Prepare Day Books, Journals, Trial Balance
♦ Prepare General Ledger for the Day
ROUTINE ACTIVITIES ( NOT ON DAILY BASIS)
PERIODICAL ACTIVITIES
♦ Accrue Interest
♦ Prepare Statutory Reports – Friday Reports for

Controlling
Authorities, i.e., the Central Banking Authority
♦ Send pieces of advice to customers
♦ Prepare statistical reports for Internal MIS
OPENING OF ACCOUNTS
Accept Detailed Information about the customer
- Demographic profile
- Income, Age, Family size
- Employment Details
- Credit Cards, Insurance Details
♦ Perform analysis required for the account type

e.g., credit rating score of the customer to be eligible for a loan
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♦ Accept and scrutinise details mandatorily required for the

Account type – e.g., loan accounting requiring collateral security
.
♦ Open the account – assign account no. Customer identity etc.
♦ Issue certificates / agreements –

e.g., term loan agreement, term deposit certificates etc.
ACCOUNT / ACCOUNT FACILITIES MAINTENANCE
♦ Standing Instructions Details
♦ Stop Cheque Details
♦ Linking Accounts
♦ Change Account Status
♦ Change in Account Address
♦ Group Interest Details
CUSTOMER DEPOSITS
♦ Cash Deposits – Accept cash and credit the account
♦ Cheque deposits – Accept cheques and forward them

for clearing
♦ FX Purchased from the customer – Accept Foreign

Currency
Cash and credit the account
♦ Travellers’ cheques purchased from the customers –

Accept unutilised TCs and credit the account
♦ Draft Purchases –
Accept unencashed drafts and credit the account
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TYPICAL DEPOSIT TRANSACTIONS AT THE TELLER MACHINES
CHEQUE DEPOSIT
♦ Accept cheques and note down the details
♦ Calculate the date of realisation of the cheques and

inform
The customer suitably
♦ Increase uncleared balance in the customer’s account
♦ If transfer from some other account within the same

Branch initiate transfer processing like getting the
Cheque debited to the issuer’s account with you,
Recording the transaction in the books as a transfer
Transaction and then crediting the beneficiary’s account
With you.
♦ If clearing operation, initiate outward clearing by

writing
The details of the cheques in the clearing register
(outward)
CUSTOMER WITHDRAWALS
♦ Cash withdrawals (withdrawal slips / cheques)

Check account balance and handover cash
♦ Cheque encashing
Validate cheque and hand over cash
♦ Travellers cheque sale

Issue travellers cheques (own and other banks)
♦ Draft sale – Issue Drafts (Own)
♦ FX Sale – Hand over Foreign Currency to Customer
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TYPICAL WITHDRAWAL TRANSACTIONS AT COUNTER
Cash Withdrawals
♦ Verify account status
♦ Verify sufficiency of Account Balances
♦ Apply overdraft limits, Credit line limits etc.
Cheque Withdrawals
♦ Verify signature, date, cheque no. etc.
♦ Verify stop on cheques
♦ Verify account status and operating instructions
FOREIGN EXCHANGE OPERATIONS
♦ Exchange rates given by the Treasury at the beginning

of the day
♦ Rates may be different as TT/Bill etc.
♦ Rates need fine tuning for a transaction/customer
♦ Variance limits assigned for fine tuning depending upon

Utility of the customer
♦ Inform Treasury at Head Office level about High Value

Transactions to facilitate Exposure Management
♦ Commission and charges usually charged in local

Currency
FOREIGN EXCHANGE TRANSACTION (F.X. = Acronym for Foreign Exchange)
FX Sale amount = $ 1000

Commission = 1%
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Charges = Rs.100/-
Exchange rate for conversion for customer to purchase 1 US $ = Rs.43/-
Indian Rupee equivalent of $ 1000 = Rs.43, 000/-
Commission at 1% = Rs.430/-
Charges = Rs.100/-
Total amount to be debited to the customer’s account = Rs.Rs.43530/-
BILL PAYMENTS
♦ Facilitates convenient payment to the account holder
♦ Reduces processing volume and time for the beneficiary
♦ Pre-authorised debits to the account
♦ Examples of bill payments –

Telephone bills, Electricity bills
Insurance Premium
School Fees, Charity Payments,
Club Subscriptions etc.
♦ Account holder gives account details to the beneficiary
♦ Account holder gives authorisation details to the bank
♦ Beneficiary or his bank collates the amount due from the

buyer
And informs the buyer’s bank
♦ Buyer’s bank debits all the charges to its customer’s account

and credits the beneficiary’s account, provided he has account
with the same bank or his bank through clearing operation etc.
FEATURES OF DIFFERENT INSTRUMENTS
CHEQUES
♦ Processed through Transfer/Clearing
♦ Instant credit not given usually for clearing cheques
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DRAFTS
♦ Prepaid at the time of issue
♦ Place of encashing the draft is known at the time of issue
♦ Issued at one place and drawn on another place – mostly

another
Branch of the same bank – exception drafts drawn on
correspondent
Arrangements
♦ Instant credit is released by the drawee branch, provided the

beneficiary
Is having account with it or otherwise, through clearing operation.
PAY ORDERS OR BANKERS’ CHEQUES
♦ For local use as opposed to draft which is for outstation use
♦ Issued by the Bank (example Interest Payment by Cheque)
♦ Issued at the request of a customer
♦ Pay order should be presented to the same branch which is

issuing
the instrument. Means this can be used only locally by a customer
who
Does not have account with that branch or bank.
TRAVELLERS’ CHEQUES
♦ Issued by a branch for domestic use or international use

provided
The branch is authorised to deal in foreign exchange
♦ Issued at the request of a customer
♦ Place of encashing the instrument is not known
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♦ Can be encashed at Branch / Departmental stores etc.
♦ Comes back to the Branch that issued it.
CHEQUES AND CLEARING OPERATIONS
PROCESSING OF CHEQUES
♦ Clearing - Outward
Inward
♦ Collection - Outstation
Foreign
PARTIES TO A CHEQUE
♦ Drawer – Person drawing or issuing the cheque
♦ Drawee – The bank which is liable to pay the cheque
♦ Payee – The beneficiary of the cheque, either whose name is

Written on the cheque or who is the endorsee of the
Cheque
♦ Collecting bank – The bank which receives payment on behalf

of its customer
♦ Clearing Section – Designated Section which deals with

Clearing operations
♦ Clearing House – Physical Location where Cheques and other

Credit Instruments are exchanged among the
Banks. Usually it is the Central Banking
Organisation which is responsible for running
The Clearing House. Some times, its duly
Authorised Representative also runs the
Clearing House
WHEN A BANK IS OBLIGED TO PAY THE CHEQUE DRAWN ON IT?
♦ The cheque is complete in all regards, i.e., with respect to details.

♦ The customer has sufficient funds in his account on which the cheque is drawn.
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♦ The cheque is correctly presented by the collecting bank, i.e., the bank of the
Beneficiary of the cheque.
CHEQUE SCRUTINY
♦ Signature – Genuineness and proper signing authority

♦ Alterations should be duly authenticated by the drawer/drawers
♦ The instrument should not be outdated (most of the countries the validity 6 months),
undated or post-dated.
♦ The amount in words and figures should be the same and there should be no
discrepancy between them.
♦ There should be no restriction on the transferability of the instrument as specified by
the drawer and if there is any restriction, the same should be adhered to.
♦ The cheque presented for cash payment across the counter should not be crossed, as
crossing (general) means that encashment is debarred.
REFUSAL OF PAYMENT
♦ If the signature differs

♦ Insufficient funds
♦ Material Alterations not properly authenticated
♦ Post-dated or out-dated
♦ Payment stopped
♦ Incompleteness
♦ Beneficiary’s bank has not properly presented or acted in accordance with the
intentions of the drawer – example, not transferable, the presenting bank is collecting
on behalf of its customer who is not mentioned in the cheque as the beneficiary but
who has come into possession of the cheque because of transfer by endorsement.
♦ Drawer deceased
♦ Drawer Insolvent
♦ When refusing payment, the paying bank should give correct reason for such refusal.
STEPS INVOLVED IN COLLECTION OF FOREIGN CHEQUES
♦ Cheques are sent to the Correspondent Bank

♦ Correspondent bank presents in clearing or if drawn on itself, credits the NOSTRO
Account of the collecting bank
♦ Advises the collecting bank upon realisation of the cheque
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CASH TRANSACTION – Refer to Specimen No. 2
OUTWARD CLEARING – Refer to Specimen No. 3
INWARD CLEARING – Refer to Specimen No. 4
TRANSFER TRANSACTION – Refer to Specimen No. 5
OUTSTATION CHEQUES - Refer to Specimen No. 6
FLOW CHART OF ACTIVITIES IN A BANK – Refer to Specimen No. 7
FRONT OFFICE OPERATIONS IN A BRANCH – Refer to Specimen No. 8
BACK OFFICE OPERATIONS IN A BRANCH – Refer to Specimen No. 9
NOTE ON CALCULATION OF INTEREST ON LOANS AND DEPOSITS – Refer to

Specimen No. 10
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BANK ACCOUNTING
TRANSACTIONS ENTERING THE ACCOUNTING SYSTEM OF A BANK
1. Cash Operations (Tellers)

2. Cheque deposits and Encashment
3. ATM Transactions – Deposits and Withdrawal
4. Funds Transfer
5. FX Sale and Purchase
6. Instruments Sale and Encashment – Drafts, TCs etc.
7. Outward Clearing Instruments Deposited by bank’s customers
8. Inward Clearing Instruments Received from Clearing House
9. Regular Bank Administrative Operations from Administrative offices, purchase of
stationary, payment of salaries to staff etc.
10. Computation and Accounting for Interest Receivable and Payable which is a periodic
activity.
FEATURES IN BANK ACCOUNTING PRACTICES AND SYSTEM
1. Every day the transactions books of the various departments have to tally with the
control books called Cash Transactions Book, Clearing Transactions Book and Transfer
Transactions Book.
2. Double Entry Booking System – means that every accounting transaction affects two
account heads in an equal but opposite manner – means that in every transaction, one
accounting head gets credited while the other gets debited with the same amount.
For example for issuing draft by Pune Branch of State Bank of India, customer’s
account has been debited with the amount of draft purchased by the customer and
inter-branch account of the branch on whom the draft is drawn is credited.
3. Periodic checks and balances with balancing of books of customers and bank’s own
administration accounts with the control book of the bank – general ledger into which
on a daily basis the posting is done from the Day Book.
4. General Ledger and Subsidiary Ledger System
5. Day Book and Daily Trial Balance
6. Periodic application of interest on loan / cash credit / overdraft accounts and periodic
accrual of interest on savings accounts / fixed deposits / recurring deposit accounts
etc.
7. Accounting for a number of contingent liabilities like letters of credit opened on
behalf of the customer in the form of contingent liabilities in Final Accounts
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ACCOUNTING EFFECTS OF TRANSACTIONS
Examples
S. No. Transaction Voucher Accounting Entry
1 Cash Deposit Cash Pay in slip Dr. Cash

Cr. Customer’s Account
2 Cheque Deposit Cheque Pay in slip Dr. Clearing Branch

Cr. Customer’s Account
Upon realisation
3 Cash Withdrawal Withdrawal slip/ Dr. Customer’s Account

cheque Cr. Cash
4 DD/TT/MT Sale DD/TT/MT slip Dr. Cash

by cash Cr. DD/MT/TT paying
branch of the same bank
Cr. Commission
Cr. Postage (if any)
5 DD/TT/MT sale DD/TT/MT slip Dr. Customer’s Account

by Cheque & cheque Cr. DD/MT/TT paying
branch of the same bank
Cr. Commission
Cr. Postage (if any)
6 TC sale by cash TC slip Dr. Cash

Cr. TC Account
Cr. Commission
7 TC sale by cheque TC slip Dr. Customer’s Account

& Cheque Cr. TC Account
Cr. Commission
8 Interest on DepositsVouchers Dr. Interest Expense

(Dr./Cr. slips) Cr. Customer Account
OR Cr. Interest Payable
9 Interest on Advances Vouchers Dr. Customer’s Account

(Dr./Cr. slips) OR Dr. Interest Receivable
Cr. Interest Income
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10 General Expense Voucher Dr. Expense

(Dr. slip) Cr. Cash
BOOKS OF ACCOUNTS AND TRANSACTIONS FLOW IN DAILY OPERATIONS
♦ Customer Ledger
♦ Cash Receipt Scroll
♦ Cash Payment Scroll
♦ Outward Clearing Register
♦ Inward Clearing Register
♦ Subsidiary Ledgers for General Ledger
♦ Day Book
♦ General Ledger
♦ Other Memorandum Books and Registers

e.g. Drafts Issue Register, Transfer scroll,
TC Issue Register etc.
GENERAL LEDGER
♦ Contains all the account heads of Income,
Expenditure, Assets, Liabilities, Head Office Account
For inter-branch transactions, Correspondent bank
Accounts etc.
♦ Posting from the Day Book
♦ An extract of all the general ledger accounts gives

Trial Balance at the end of the day
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MAJOR ACCOUNT HEADS IN GENERAL LEDGER

♦ Cash Account
♦ Accounts with other banks
♦ Accounts with other branches – Head Office/

Inter-branch transactions
♦ Various types of deposit accounts of customers

♦ Various types of loans and advances of customers
♦ Share capital Account
♦ All types of income accounts
♦ All types of expense accounts
♦ All types of Fixed Assets of the branch
END OF THE PERIOD ACCOUNTING ACTIVITIES
♦ Interest Accrual and Capitalisation
♦ Depreciation of Assets
♦ Provision for Unpaid Expenses
♦ Creation of Reserves
♦ Revaluation of FCY Accounts
♦ Provisional Closing and Transfer of Profit/Loss to HO
♦ Reopening of Books and Back Dated Entries upon

Finalisation of accounts for the branch
♦ Ascertainment of Contingent Liabilities
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PERIODIC RECONCILIATION ACTIVITIES
♦ Suspense Accounts
♦ Inter-Branch and HO Accounts
♦ Inter Bank Accounts
SUSPENSE ACCOUNT
♦ Why Suspense Account?
♦ Need for Control of Suspense Accounts and the Risks

Associated with Suspense Account
♦ Reconciliation Process
- Matching Debits and Credits

- Based on Doc. No. Value Date & Amount
- Unreconciled entries to Account for balance
In the Account
INTER BRANCH ACCOUNT
♦ For Remittances
♦ For Clearing (Local Branches to Main Branch

And Main Branch to Local Branches)
♦ Originating and Responding Entries
♦ Bills Transactions (outward and inward)
♦ Instruments deposited by customers sent to

Upcountry branches for collection (outward)
And received from outstation branches (inward)
♦ FCY Transactions Etc.
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INTER BANK ACCOUNTS
♦ Correspondent Banks With Whom NOSTRO Accounts

Are Maintained
♦ Correspondent Banking Arrangements

Within A Country on A Reciprocal Basis
♦ Other Banks With Whom Current Accounts Are

Maintained For Clearing Operations Etc.
♦ Accounts With Federal OR Central Banking Authority

OR Its Duly Authorised Representative Bank/s
♦ NOSTRO Statements and Image Accounts
♦ Reconciliation Based On
- Doc. No. Value Date and Amount
- DRS. Matched with Corresponding CRS.
- Inter Bank Dues to be Reconciled periodically
PRECAUTION WHILE REMITTING FUNDS FROM ONE PLACE TO ANOTHER PLACE
This depends upon the mode of remittance:
1. Demand Draft - a branch of a bank usually draws it on another branch of the same
bank. This is true of operations within the same country. However, it is quite common
that internationally, drafts are drawn on correspondent bank in case the drawing bank
does not have its own branch in that place. This mode of remittance has to ensure
that the branch on which the draft is drawn is aware of the transaction by sending a
suitable advice to the drawee branch immediately after issuing the draft. Neither the
remitter nor the beneficiary needs to have a bank account with the bank issuing the
draft. Authorised officials of the bank whose signatures are available with the paying
branch alone should sign the demand drafts.
2. Mail Transfer – The customer has to have an account with the remitting branch and
the beneficiary has to have an account with another branch of the same bank, unlike in
the case of demand drafts. The transfer is authorised by authorised officials of the
bank whose signatures are on record with the paying branch.
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3. Transfer by Wire or Telegraphic Transfer – Since this is an open mode of transfer,
there is a need for coding and decoding. The coding involves various parameters as
under:
♦ The code of the remitting branch
♦ The code of the responding branch
♦ The date of the transaction
♦ The day of the transaction
♦ The month of the transaction
♦ The amount involved etc.
Upon receipt of the telegraphic transfer communication, the responding branch will
decode the entire message and will keep it in abeyance in case there is any discrepancy
in the message. It will seek clarification from the remitting branch and only upon
being thoroughly satisfied the message is responded to.
4. Electronic Mail Transfer – In case online connection is available within a bank among
the branches through networking, as is the case with most of the foreign banks and
recent private sector banks in India, remittance is done through this networking and
the beneficiary's account gets credited on the same day anywhere in the country.
This is the latest mode of remittance and has revolutionised remittances and customer
service across the globe. Most of the US Banks have networking through satellite link
and use exhaustively this mode for remittance from one place to another place not
only within the country but also globally, at least in selected centres.
5. SWIFT Transfer – Society for World Wide Inter-Bank Financial Tele-communications.

This was the most common mode of transfer before EMT came into existence. This
used to ensure that communication for remittance is received within 48 hours of issue
from one place. The message is as per pre-set format and is the most economical
mode of communication. The receiving branch verifies the authenticity of the message
before responding to it or acting on it.
SWIFT MESSAGE – Refer to Specimen No. 12
ADMINISTRATIVE FUNCTIONS IN A BANK
Different administrative units in a Bank
There is distinction between banking operations at a branch level and at administrative

levels. The names of the administrative offices differ from one banking institution to
another. Please refer to Section 2.4 – page no. 37 also in this behalf. To illustrate the
same, let us study the following structure.
Tier No. 1 – Branches of various business mix and sizes of business, small, medium, large
and very large.
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Tier No. 2 – Regional Offices or Area Offices
Tier No. 3 – Zonal Offices or Divisional Offices
Tier No. 4 – Head Office
Tier No. 1 functions already seen.
Tier Nos. 2, 3 and 4 constitute the administrative units of the bank. It does not mean
that at the branch level there is no administration. What the branch does is called
“branch administration” as opposed to the function of these 3 tiers, known as “bank
administration”.
Typical functions of different administrative units of a bank:
1. To ensure conformity with the rules and regulations of Head Office by the branches
and other smaller administrative units under its control.
2. To ensure conformity with the Central Banking Rules and Regulations as applicable
from time to time by all the branches and other smaller administrative units under
control. (In India, the central banking agency is the Reserve Bank of India.
3. To grant loans and other credit facilities to branch borrowers whose requirements fall
outside the delegated authority of the proposal referring branches/smaller
administrative units, but within its own delegated authority.
4. To co-ordinate the activities of all the branches/smaller administrative units within its
jurisdiction.
5. To administer the branches/smaller administrative units under its control in matters
relating to leave of the managers of the branches, branch premises, other bank assets
at the branch level, transfer of bank officers within the area of jurisdiction as per its
delegated authority.
6. To recommend any proposal to the higher administrative unit of the bank for sanction
of loans and other credit facilities whenever the requirements fall beyond the purview
of its delegated authority.
7. To ensure periodic audit of the branches and other smaller administrative units of the
bank by duly appointed teams of auditors, who are officers from the bank itself.
8. To maintain liaison with other banks in the same geographical location at a
corresponding level – Area Office of one bank with similar administrative units of
other banks operating in the same area etc.
9. At the Head Office level –
♦ To maintain liaison with top administrative units of other banks.

♦ To maintain liaison with the Central Banking Authority
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♦ To evolve policy every year relating to the bank in the areas of business
development, branch expansion, opening of branches abroad etc.
♦ To maintain vigilance cell for detecting frauds within the bank, dealing with errant
bank officials, conducting personnel enquiries against bank employees etc.
♦ To look after international wing of the bank, like opening of branches abroad, types of
business to be undertaken there, where to open bank accounts, which banks abroad
should be correspondent banks of the bank etc.
♦ To hold negotiations with other banking institutions (globally) for establishing
Lines of credit for utilisation within the country.
♦ To evolve policy and administer the same relating to personnel within the bank, like
promotion, transfer, recruitment, service rules and regulations, dismissals,
superannuation benefits etc.
♦ To decide about the delegated authority at various levels of the banks, like branches,
administrative offices etc.
♦ To co-ordinate in preparation of final accounts of the bank on an annual basis.
♦ To facilitate audit of the bank by the Central Banking Authority.
♦ To ensure co-operation with all Govt. Agencies within the country.
♦ To evolve on an on-going basis, suitable systems for smooth bank administration.
♦ To do investment banking by investing funds set aside by way of CRR, SLR etc. for the
bank as a whole in suitable securities.
♦ To take decisions relating to raising resources by way of equity, preference share
capital, bonds (domestic as well as global), debentures (domestic as well as global),
loans (domestic as well as global) etc.
♦ To take decisions relating to lending resources to other financial institutions (domestic
mostly).
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Banking Business vs. Other Business
To conclude this course material, it is necessary for us to understand how banking

business is different from other business. The following points indicate broadly the areas
of difference between a banking business and other types of business, namely,
manufacturing, services, trading etc.
1. Bank deals in money/finance unlike others and hence is required to evolve all checks
and balances to ensure that the trust and confidence of the depositors and other
customers is kept up. For this, suitable control measures like dual control (control in
the same banking unit at two different levels with two different types of personnel)
need to be evolved to prevent frauds in the bank.
2. Banking operations need to be automated much more than other business due to the
need for control and the routine/repetitive nature of business. This will not only
ensure better operating efficiency but also compliance with the control system.
3. In other business, profit and loss accounts are prepared may be once in a month,
whereas a bank prepares the same every day. At the end of each day, the position
relating to deposits, advances, profit or loss as the case may be will be known to the
banking business unit, namely the branch.
4. In other business, the entire resources can be used excepting for a small portion kept
in the form of cash, while in banking business, a substantial portion of resources gets
locked up in investment as required by CRR/SLR.
5. In other business, cash flow statement is prepared usually for a period of a month,
whereas in the banking business, every day it is required if not in great details, at
least on a summary basis.
6. The Regulatory Authorities like the Central Banking Authority control a bank, whereas
other business is not directly controlled by any statutory authority.
7. Bank’s contribution to growth of an economy is manifold as compared to the
contribution to an economy even by the largest corporate conglomerate.
*** End of PART I of course material ***
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Part II - Capital Markets
3.1 Terms associated with shares and securities
Primary market – This does not represent any market place. This is the platform on which
the limited companies, public sector undertakings, corporations, financial institutions,
banks etc. who require equity/preference share capital funds as well as
debentures/bonds, raise these resources directly from the investors by issuing
instruments of claim on themselves like share certificate, debenture certificate, bond
etc. All public issues of share capital, debentures, bonds etc. are regulated by the
Securities Exchange Board of India (S.E.B.I.).
Secondary market – This represents a market place in the form of stock exchanges
controlled by the Securities Exchange Board of India who is the monitoring authority for
monitoring the Securities Contracts Regulations Act and Rules. In this market, shares,
bonds, debentures etc. which have been acquired in the primary market are exchanged
among the investors for financial consideration. The corporates or companies, which have
raised resources in the primary market are not connected with the secondary market and
in no way are benefited from the transactions in the secondary market. It is not
necessary that in the secondary market all the transactions are necessarily routed
through stock exchanges only. Outside stock exchanges also, transactions take place. In
case of transactions through stock exchanges, they are put through “brokers” who take
their broking commission from the buyers/sellers. Outside stock exchanges, brokers may
or not be involved.
Note- Both primary market and secondary market form an integral part of what is known
as “the Capital Market”.
Learning points –
 Primary market is not exactly a market place, although it facilitates raising of

resources by the users of these resources from the saving units in the economy;
 While primary market taps the resources from the saving units, the secondary market
enables an investor to dispose of his investment to another investor for monetary
considerations;
 The secondary market operations may increase the wealth of the shareholders but do
not bring in any additional resources to the security issuing company.
 Both primary markets, especially all public issues of debt and share capital and
secondary markets, especially stock exchanges and brokers come under the monitoring
and regulation of SEBI
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Equity share capital – Forms the major/entire portion of the share capital with a small
component in the form of preference share capital. Any limited company should have this
share capital, whereas preference share capital may not be there in all the companies.
There is neither a commitment of dividend in the year of loss nor any ceiling on dividend
rate in a year of outstanding profits. Entitled to voting rights on all issues relating to the
business of the company. Gets dividend only after preference share capital and gets paid
last in case of liquidation of the company after preference share capital. The company
cannot pay equity share capital back to its owner, during the course of the existence of
the limited company. The only way to dispose of equity share capital is to sell it off to
somebody for monetary consideration. Any public issue of equity share capital requires
approval of SEBI.
One of the major differences between the equity share capital and preference share
capital is that equity share capital is entitled to “bonus shares” as well as participates in
“rights issue”. The equity share capital owners enjoy absolute voting rights on all the
matters concerning the company.
Preference share capital – Forms a small portion of share capital. Need not be in all the
limited companies. Preferred for payment of dividend over equity shares but at an agreed
rate. Paid back even during the course of business in case the preference shares are of
redeemable variety (redemption – payment back to the investor). Gets preference at the
time of liquidation of the company over equity shares. Can be of different varieties, like
redeemable (payable back), convertible (convertible into equity shares after a specified
period), cumulative (where dividend gets cumulated), non-cumulative (where dividend, if
skipped in a year, is lost) etc. It should not be assumed that even in a year of loss,
dividend is compulsorily paid on preference shares.
However, on resumption of dividend, the arrears of dividend on preference shares are

cleared first before resuming dividend on equity shares. In the case of cumulative
variety, dividend gets accumulated even for the loss years once dividend is resumed. The
investors in preference shares are usually the promoters, financial institutions, banks,
corporates, mutual funds etc. who park a part of their funds in this instrument for the
sake of preference of dividend on this instrument over equity shares. Any public issue of
preference share capital requires the approval of SEBI. The preference share capital
owners do not have voting rights on the matters concerning the company, unlike the equity
share capital owners.
Learning points:
 While equity share capital forms the bulk of the share capital, preference share
capital forms only a small percentage of share capital;
 Equity capital owners are considered to be the true owners of the company and enjoy
absolute voting rights on all issues concerning the company, while the preference share
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capital enjoy preference on dividend at the committed rate but do not enjoy any voting
rights on any issue concerning the company, excepting where their dividend is in
arrears.
 Equity share capital and preference share capital constitute the share capital in a
limited company.
Debentures: Debentures are instruments issued by financial institutions, non-banking

financial companies, manufacturing companies etc. These are usually repaid over a period
of time or at one time after a specific period (bullet repayment or “single shot”
repayment). The debentures are backed up by “security” in the form of “fixed assets” of
the company, especially in the case of non-banking financial companies and manufacturing
companies. In the case of financial institutions, they are usually “unsecured”, i.e., without
the back up of any security of asset of the issuing company. Interest gets paid as per the
terms of the contract, i.e., monthly, quarterly, half yearly or gets accumulated throughout
the period of maturity and gets paid on maturity along with the principal amount. Any
public issue of debentures requires the approval of Securities Exchange Board of India
(SEBI).
Bonds: Till recently, only financial institutions were issuing bonds for raising resources.
Of late, however, limited companies have started issuing bonds for this purpose. Example,
Reliance’s 100 year and 30 year bonds, TELCO’s 25 year bond etc. These instruments are
by and large “discounted” instruments. This means that right now, you invest “discounted”
amount in the bond and get after a fixed period “maturity value”, which is also known as
“Face value”. The discounted value is arrived at taking into consideration the following:
• The coupon rate, which is the interest rate on the instrument

• The period of the bond
• The periodicity or frequency of compounding of interest, if it is more frequent than
once a year, like, half yearly, quarterly or monthly.
Deep discounted bonds refer to the long period of investment and subsequently the long
period over which the face value is discounted. This instrument is usually for
“infrastructure” projects, which have long gestation period and low returns in the initial
period. Any public issue of “bond” requires the approval of SEBI.
Learning points:
 Bonds and debentures form a part of the debt capital of a limited company. While
bond is mostly a discounted instrument with a nominal value payable after a specified
period, debenture could be convertible, redeemable etc.
 Both attract interest unlike the share capital
 Public issue of bond/debenture require SEBI approval
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 Deep discounted bonds are discounted over a long period of time and hence suitable
for “infrastructure” projects, which have long gestation period.
Yield – Yield is the return that a shareholder, a bondholder or a debenture holder has
earned on his investment, be it originally purchased from the issuing company or
acquired from the market.
Yield to maturity – (I) The return obtained on holding a bond to maturity. The yield-to-
maturity assumes that any coupon payments received before redemption can be
reinvested at this yield. This implies a flat yield curve and is hence not a realistic
assumption.
(II) The discount rate that equates the P.V. of the cash flows to its market value.
Redemption – Repayment of a bond or debenture on maturity. This is as per the date

mentioned on the bond/debenture certificate. This could be at a premium or at par. If at
premium, the investor gets more money than the face value and if at par, the investor
gets the same money as the face value.
Mutual Funds – An investment organisation, which invests in shares, debentures, bonds,

securities of public/private sector undertakings, Government bonds etc. for getting
dividends/interest from these investments and passing on to the investors from whom
they have raised resources for running the mutual funds. The unit of investment is called
“units”. The periodic return is called “dividend”. Income of mutual funds in India is
exempted from income tax. Examples - Unit Trust of India, Morgan Stanley Funds,
Kothari Mutual Funds etc. This is called “Portfolio Management”. The mutual funds invest
in various securities instead of direct investment by the investors themselves. This is the
best example of “Portfolio Management”.
Money Markets – Short-term markets up to a period of 12 months. The players and the
money market instruments are listed below:
Borrower Instrument/Markets Purpose
Government of India Treasury bills of To meet the fiscal deficit

14days, 91 days estimated as per the annual
182 and 364 days budget.
Commercial banks Call money markets To meet the shortfall in the

Statutory Liquidity Ratio/Cash
Ratio requirements as per
R.B.I. directives.
Limited companies Commercial paper Working capital – day to day
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Bills Discounted business requirement.
Fixed deposits
Within 12 months
Inter-corporate
Deposit
Learning points:
 Budgetary deficit to an extent is financed by “Government Treasury Bills” which

constitute claims on the Government of India through R.B.I.
 Call money market is exclusively for banks and financial institutions and not available
to corporates.
At par – A price equal to the face value of a security, which means it is neither at a
premium nor at a discount.
At premium – A price which is more than the face value of the security.
At discount – A price, which is less than the face value of the security.
Face value or nominal value: This is the amount mentioned in the share certificate by a
company and represents the consideration paid by the original purchaser of the shares
and not the subsequent purchasers in the secondary market. Usually face values for
equity share capital in India are Rs.10/- or Rs.100/-, while in the case of preference
shares or debentures, it is a minimum of Rs.100/-. Debentures could be in multiples of
Rs.1000/- also. Bonds have usually maturity value and the minimum amount mostly is
Rs.10000/-.
Book value: This is applicable only in the case of equity shareholders. The others are paid
interest or fixed dividend as the case may be. They do not have any share in the profits
retained in the form of “reserves”, to which only the equity shareholders are entitled,
being the owners of the company. Suppose a company has raised share capital to the
extent of Rs.500 lacs with face value of Rs.100/- per share. They will have issued 5lac
shares. Suppose after 2 years, the net worth (Capital and reserves and surplus) increases
to Rs.1000 lacs. This means that the book value of the share has doubled, i.e., from
Rs.100/- to Rs.200/- per share.
In case there is preference share capital also in a company, then the book value of the
share is calculated as under:
Net worth of the company (-) Preference share capital

Number of equity shares
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Learning points:
 Companies can raise share capital at a premium also, i.e., more than the face value of
the shares. This excess money should be credited to a separate account called “share
premium account” under Capital and Reserves.
 Appreciation in book value is direct indicator about profits retained in business.
 Preference share capital is not a part of the book value of equity shares.
Bonus Issue: Suppose the equity share capital of a limited company is Rs.100 lacs and the
net worth is Rs.500 lacs. Let us assume that there is no preference share capital. Hence
the entire Rs.500 lacs belong to the equity shareholders. As seen in the earlier
paragraph, the book value of the share is Rs.500/-, in case the face value is Rs.100/- for
each share. As the book value is due to profit retention in business, as a matter of policy
and to reward equity investors, management declares bonus shares out of the reserves.
This means that equity investors do not have to invest any money to be able to get bonus
shares. Let us assume that in this case, for every 1 equity share, 2 bonus shares are
issued. This means that after the bonus issue, the net worth would be as under:
Share capital – Rs.300 lacs (Rs.100 lacs original paid-up capital + 200 lacs reserves
capitalised) and
Reserves – Rs.200 lacs
Net worth – Rs.500 lacs
Thus, we see that bonus issue does not increase the net worth of the company, as no fresh
funds are introduced into the system. However, the equity share holder, who would have
received till now dividend on say 100 shares, after the bonus issue would receive dividend
on 300 shares. Even if the dividend rate comes down a bit, the dividend income increases
tremendously. As regards the market price, let us assume in this case, before the “bonus
issue”, it was Rs.300/-. The number of shares has tripled. However, by and large, in the
case of strong companies, the market value would not be one third of the original price.
It would be around 40% of the original price. This is the advantage of “bonus issue” to an
equity investor.
CB – Cum-Bonus – The buyers of such shares are entitled to bonus shares in view of
registration of shares in their names before the cut-off date announced by the company
for issue of bonus shares. Usually, if the announcement has already been made of a bonus
issue, the seller of the share is compensated for this also.
X-Bonus – The transaction is carried out after the bonus issue at the new market price
after taking into consideration the increase in shares due to bonus issue.
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Rights Issue: In this case also, let us assume that the original equity share capital is
Rs.100 lacs and the management wants to raise another Rs.200 lacs by way of equity share
capital through “Rights Issue” and not “Public Issue”. Then all the equity investors are
offered the “Rights” at the rate of 2 Rights for 1. The issue could be at “premium” or
at “par” depending upon the confidence of the management to raise the resources from
the existing shareholders. If the company is doing well, the chances are bright for it to
make a successful issue even with “premium”.
After the “Rights”, the net worth of the company would in this case be Rs.300 lacs, in
case the issue is at “par” and more in case the issue is at a “premium”. The company has to
show the “premium” so collected separately under the head “share premium reserve or
account”. Here also, the post-rights issue market price would be slightly higher than the
pre-rights issue market price, with notable exceptions.
CR – Cum Rights Issue – The buyer of the share is entitled to “Rights Issue” as he has
registered his purchase before the cut-off date announced by the company, which is
issuing the rights shares. The usual practice is that the price is slightly higher in case the
company has already made the announcement.
X-Rights – Transaction after the rights issue is over, i.e., at the new market price, after
taking into consideration the increase in the number of shares etc.
Learning points:
 Bonus shares are capitalisation of reserves without any fresh funds coming into the
system;
 Rights issue is further share capital from the existing equity share owners at a price,
which could be at a premium.
 The market takes into consideration the additional number of shares available ex-
Rights and ex-Bonus and accordingly the price is adjusted.
Market value: This is independent of the face value and the book value. Ideally speaking,
this should be higher than the book value of the share. At present, though in India, we
have a number of scrips, which are selling less than even the face value of the shares,
leave alone the book value.
Dividend: This is a share in the profit after tax of the company, which a limited company
distributes among its equity shareholders. The balance is retained in business in the form
of “Reserves” and is also called “Retained Earnings” or “Profit Retained in business”. The
dividend declared is always a % on the face value of the share and does not have any co-
relation with the market value of the share. As per the provisions of The Companies Act,
a limited company, unlike a partnership firm, cannot distribute the entire profits after
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tax to the shareholders. Depending upon the percentage of dividend declared on the
equity share capital, they are supposed to transfer a specified percentage of the profits
after tax to “General Reserves”. Such dividend on the equity share capital is declared
after paying dividend on the “preference share capital”, if any.
CD or Cum-Dividend – The buyer of the share is entitled to dividend declared provided he

buys the share before the book closure of the company. CD shares are sold at a slightly
higher price than those that are sold after the book closure.
Dividend rate: This is the rate at which dividend is paid to the equity shareholders and is
expressed in terms of % of the face value of the share. Suppose the face value of the
share is Rs.100/- and the company is declaring dividend of 25%, it means that the dividend
rate is 25% and the dividend amount is Rs.25/-.
Dividend pay out ratio: This is the amount of dividend expressed as a percentage of the
profit after tax for the company. Suppose the profit after tax is Rs.100 lacs and the
dividend declared is Rs.30 lacs, the dividend pay out ratio is 30%. This is different from
the dividend rate.
Dividend yield: This is the relationship between the dividend value and the market value of
one equity share. Suppose dividend declared is Rs.5/- on face value of Rs.10/- (dividend
rate at 50%) and market value of Rs.50/- the dividend yield is 10% and not 50% which is
the dividend rate.
Dividend policy: This is the policy adopted by a limited company on the matter of declaring
dividend on equity share capital. This depends upon various factors as under:
• Corporate philosophy of high/moderate/low dividend

• Market expectations on dividend
• Dividend rates of similar units in the same industry
• Requirement of resources for the company, likes expansion of activity, diversification
etc.
• Requirement for cash for paying out the dividend in accordance with the rules in this
behalf
• Whether the company is going to the public for raising further equity, in which case,
they may increase the dividend rate;
• Are they going to declare bonus shares, in which case they may not increase the
dividend rate and just maintain or even decrease the dividend rate?
• Compulsions in the case of institutional investment or investment by foreign
collaborators who want a certain percentage of dividend on their equity holding etc.
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Learning points:
 Both dividend and profit retained in business belong to the equity shareholders.
Dividend is the portion of the profit distributed among the equity shareholders.
 In terms of dividend yield, it is related to the market price of the equity share and
not the face value;
 With effect from 01/04/97, companies declaring dividend are required to pay 10%
additional tax by way of profit distribution tax on the amount of dividend declared by
them;
 While market conditions do exercise great influence on the dividend declared in an
industry, the corporate philosophy on dividend also plays an important role in the
decision.
Returns: It is a combination of periodic return in the form of dividend and capital gains
due to market capitalisation. For example, we purchase a Rs.10/- (Face Value) at Rs.100/-
in the market. This is the market value of the share. Suppose dividend rate is 50% on
the face value and we are able to sell the share in the market after one year at Rs.125/-.
Let us determine the return on the share.
Dividend yield = 5/100 = 5% and capital gain is = 25/100 = 25%. Hence, dividend and
capital gains together would work out to 30%.
Earning per share: (EPS)- This is a combination of “dividend per share” and “retained
earnings per share”. Let us consider the following and determine the earning per share:
Face value of the share – Rs.100/-
Profit after tax – Rs.100 lacs
Dividend rate – 30% on Rs.100/-, i.e., Rs.30/- per share on 1lac shares and hence total
dividend declared is Rs.30 lacs
Dividend per share = Rs.30/-
Retained earnings per share = Profit after tax (-) total dividend declared/No. of equity
shares = 100 lacs (-) 30 lacs/1lac shares = Rs.70/- per share.
Thus the total earning per share called “EPS” is Rs.100/- in this case. This can be directly
determined as under:
Profit after tax (-) dividend declared on preference share capital/No. of equity shares.
In our example, we have assumed that there is no preference share capital. We know that
preference share dividend is at a fixed rate and does not vary during its term. In case
preference share capital is also there, then the above formula for earning per share would
stand modified as under:
Profit after tax (-) dividend on preference share capital/No. of equity shares.
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Price earning ratio – This is the relationship between the earning per share and the
market value of the share. Suppose face value of a share is Rs.10/-, the market value is
Rs.50/- and the earning per share is Rs.8/-, then the price earning ratio is 50/8 = 6.25.
Thus P/E ratio is dependent upon only the market price and not on the face value of a
share. The three parameters, namely, earning per share, price earning ratio and the
market value of the share are all inter-related.
EPS x P/E ratio = Market value of the share.
Hence, if two of three parameters are given, the third one can be found out. Now that
the capital market is down in India, the P/E ratio for most of the companies is not very
high, excepting the software industry. Generally, the market dictum is that you purchase
shares with low P/E ratio, provided they have the future earning potential and sell off
when the P/E ratio is high. This is a relative phenomenon and not an absolute one. This
depends upon the sentiment in the market in general and towards a particular share
specifically. During the share market boom times, our country had witnessed very high
P/E ratios in the range of 30/40. The level of P/E indicates whether a particular share is
under-priced (low P/E ratio with good potential) or over-priced (high P/E ratio and it has
peaked out).
Market capitalisation – This is the total number of equity shares multiplied by the current
market rate per share. The market capitalisation rate is the rate at which the market
capitalisation increases over a specific period of time. This is the good indicator for the
performance of an equity share.
Learning points:
 Return on equity investment is a combination of dividend and capital gain in the market
due to difference in purchase price and selling price.
 Market capitalisation is an indication of the performance of a company in the stock
markets.
 P/E ratio is an indication about the timing of the decision to purchase or sell a share.
If it is high and peaked out, it is time for sale and it is low and has earning potential, it
is time for purchase and if it is moderate, it is time to hold and watch.
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Terms associated with share markets:
Securities Exchange Board of India– Acronym SEBI. Established as per SEBI Act in
1992. Responsible for regulating the capital markets, both the primary market and
secondary market. Hence, all the public issues of share capital, debentures, bonds etc. as
well as operations in the secondary market through all stock exchanges come under the
purview of Securities Contracts Regulations Act and Rules, 1956. (S.C.R.A.)
Stock Exchanges: Stock Exchange is a place in which trading in securities takes place
through “brokers”. All stock exchanges come under the control of “SEBI” and none else.
This is as per S.C.R.A. Any security which is traded in the stock exchange should either
be a listed security with that stock exchange for which the company concerned would
have paid listing fees or an approved security which is listed on some other stock
exchange. As per SEBI’s insistence, depending upon the size of the issue, a security is
required to be listed with more than one stock exchange. Stock exchanges can be
partnership firms, limited companies etc. They evolve their own byelaws and rules and
regulations but within the purview of S.C.R.A. and rules in this behalf. All the brokers who
participate in trading in an exchange are required to be registered with that particular
stock exchange.
Broker – A securities merchant who is registered with a stock exchange and does buying
or selling of securities on behalf of his customers through contracts with them. For this,
he gets brokerage from his clients. A broker can be registered with more than one stock
exchange.
Bulls – A class of market players in the secondary market, who go on “buying spree” in
certain selected scrips so that these scrips rise in prices sharply.
Bears – A class of market players in the secondary market, who go on “selling spree” in
certain selected scrips so that these scrips fall in prices sharply.
Going long – Being bullish about a scrip and going on a “buying” spree. Taking a purchase
position.
Going short – short selling – speculating – being bearish about a scrip and taking a sale
position without possessing the shares.
On line trading - A system in which the prices of all the scrips being traded are available
on the computer terminal so that orders can be booked, based on these prices immediately
without physically going to the stock exchange – example, the National Stock Exchange
(NSE). Similar on line trading has been introduced in several stock exchanges since the
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advent of NSE. BSE also has on line trading system installed now. This is also referred to
as "screen based" trading. India is one of the very few markets in the developing world
which has well integrated "on line" trading system in the secondary market for securities.
All the stock exchanges in India are connected through satellite for this purpose.
Stop loss order – This is an order for sale of securities most of the times, as per which,
the broker has to sell off the shares the moment the price of a particular scrip comes
below a particular given level, so that any further reduction in the market price would not
affect the securities holder. Invariably this is employed more often by people who trade
in securities rather than the investors.
Bombay Stock Exchange Sensitive Index – BSE Index – An index of 30 selected scrips to
show the market movement of these scrips, from the base level prices of these scrips at
the end of a particular year.
BSE “A” group, “B1” group and “B2” group of shares – “A” group is also referred to as
“specified” group or “forward” group. This covers about 150 scrips and the scrips keep on
moving in and out of the list, depending upon the performance. The criteria for selection
of particular scrip in “A” group are:
• large volumes;
• investors’ interest in the scrip, both by size of the shares and number of
shareholders;
• number of trades etc.
This group is also known as “forward” group as the settlement can be carried forward
from one settlement period into another period. This allows for speculation and is absent
in the National Stock Exchange. As a result of this speculation, we have two phenomena,
called “Badla” and “Backwardation” or “ulta/undha badla”.
“B1” group represents more active scrips among the other scrips, which are listed in BSE
for trading after deducting 150 scrips of “A” group. This is cash group, in the sense, it
has to be settled for in cash within a settlement period and cannot be carried forward to
the next settlement period. “B2” group represents less active scrips among the other
scrips, which are listed in BSE for trading. This is also similar to “B1” group, in the sense,
that it is settled for cash and not permitted to be carried forward to the next settlement
period. Nowadays, the settlement period in BSE is one week. The settlement date on the
NSE is every Tuesday. NSE does not have any bifurcation of scrips into groups unlike the
BSE.
Badla:
Permitted only in specified securities and involves carrying forward of one transaction
from one settlement period to another settlement period. If this is at the instance of
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the buyer, it is because he does not have the money to settle the transaction immediately.
He has entered into a purchase contract, as he feels that the price is going to rise and
hence he wants to purchase at the current market price. He is often referred to as the
“bull”, as he speculates an increase in prices. He is supposed to be taking a “long” position,
i.e., a position to purchase stocks without the money to settle the transaction within the
first settlement period. Similarly, the seller is referred to as the “bear”, as he is
speculating reduction in the price of particular scrip. He is supposed to be taking a
“short” position. "Futures" trading are replacing "Badla" transactions. The "futures"
contract is registered with a SE unlike the "badla" contracts.
Let us work out two possible scenarios under which we can work out the cash flows
position.
A. The price on the settlement day is higher than the purchase price-
Number of shares bought: 100
Purchase price: Rs.120/- per share
Price on the settlement day: Rs.130/- per share
In this case, on the settlement day, if the buyer and the seller decide to carry the
transaction forward, the seller would pay the buyer the difference of Rs.10/- per share.
A new transaction price would be assigned at Rs.130/- per share. This means that as and
when the buyer takes delivery of the shares, Rs.130/- should be paid instead of Rs.120/-.
As the amount is not settled immediately, this is an implied loan from the seller to the
buyer on which he is entitled to receive interest from the buyer. If badla charges are 2%
per month, for a typical 14-day settlement period, the buyer would pay the seller 1% on
the transaction. Thus, for the above transaction, the buyer would pay at 1% on Rs.130/-
Rs.1.30 per share or Rs.130/- for 100 shares. The seller would pay to the buyer Rs.1000/-,
being the difference between the purchase price and settlement day price. Net cash
inflow to the buyer would be Rs.1000/- (-) Rs.130/- or Rs.870/- during the first
settlement period.
At the time of settlement of the transaction in the next settlement period, the buyer
would purchase the share at Rs.130/- and close the transaction.
B. The price on the settlement day is lower than the purchase price:
Number of shares: 100
Purchase price: Rs.120/-
Price on the day of settlement: Rs.110/-
In this case, on the settlement day, if the transaction has been carried forward, as the
price has fallen, the buyer compensates the seller to the extent of Rs.10/- per share and
the new transaction price would be Rs.110/- per share. If the interest rate is 2% per
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month, again at 1%, the buyer would pay the seller, in all, Rs.1110/-, Rs.1000/- towards the
difference in price and Rs.110/- towards badla charges. At the time of settlement of the
transaction in the next settlement period, the buyer would purchase the share at Rs.110/-
and close the transaction.
Backwardation
It is not as if whenever a transaction is carried forward, it is always the buyer who has to
pay the badla or the forwardation charge to the seller. We may have situations, when the
buyer has enough resources to pay for his purchase of shares on the settlement day, but
the seller is unable to deliver the share certificate. In such a case, the seller may have to
pay a backwardation charge to the buyer. This is known as “undha badla” in the local stock
exchange parlance. Just as “badla” is a charge the buyer pays the seller for his inability
to pay the money for settlement of a contract, “undha badla” is a charge the seller pays
the buyer for his inability to deliver the securities on the settlement day.
Beta – A measure of a security’s performance in relation to the general movement of the

market. A share with a beta of 1 rises and falls corresponding exactly to the market. The
rise or fall in a security with a beta higher than 1 is more than that of the market and the
rise or fall in a security with a beta less than 1 is less than the rise or fall in the market
index.
Buy back – Repurchase of convertible or non-convertible debentures or the non-

convertible part of partly convertible debentures before the stipulated period, at par or
at a discount, by companies. SEBI and the Companies Act have started permitting buy
back of equity shares by public limited companies. As per this provision, public limited
companies can buy back from shareholders, its own equity shares to improve its
performance in EPS and market price.
Circuit-breakers or “Filters” – This is one of the measures employed by the stock

exchanges to reduce the heat in a particular scrip which shows tremendous volatility
during the course of a day’s trading itself. Both in the case of upward movement and
downward movement, to control wild fluctuation, beyond or below a specified price,
trading is suspended by the stock exchange in that scrip until the heat reduces and
normal trading resumed.
Floating stock – The fraction of a company’s paid-up capital, which participates in day-to-
day trading in the stock exchange.
Growth Fund – A mutual fund, which invests only in securities that have scope of good
capital growth rather than current income.
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Income Fund - A mutual fund with investment mostly in debentures bonds and high
dividend shares. This type of fund attracts investors interested in income rather than
growth of their investment.
Insider – A person working in a particular company in an important position in possession of

crucial facts about the company such as contracts won, takeover bids, current results
etc., which the public is unaware of. Insiders include owners, executives and consultants
of a firm. It is illegal for an insider to indulge in speculative trading in the company’s
shares.
Insider trading – Insider indulging in speculative activity in the shares of the company in
which he is an insider;
Institutional investor – Mutual Funds, Unit Trust of India, L.I.C., G.I.C., banks, Financial
Institutions etc. Their volumes are usually high and play a supportive role in the case of
falling markets.
Kerb dealings – Transactions done among members after the closing of official trading
hours and outside the stock exchange, even though such trading is strictly not legal. This
accounts for sizeable percentage of total trading in the Indian stock exchanges.
Market-maker – An individual or an organisation which, in exchange for reduced dealing

fees and other concessions, commits in certain securities, contracts or markets to
continuously make two-way prices, both sale and purchase, at an agreed minimum spread
differential and for an agreed minimum volume, during market hours.
Market lot – The minimum number of shares in a trading lot and mostly it is 100 and
seldom higher than that. Very rarely, it is 10. If it is less than market lot, it is called
“odd lot”. Owing to practice of trading in demat shares, the market lot is fast losing its
significance.
Moving average – An average of share prices for specified periods showing trends of price
movements, rather than daily fluctuations. A monthly moving average will take a month’s
prices until yesterday and for tomorrow’s average it will drop the earliest day and include
today in its place.
Dematerialised shares also called (Demat shares) – This is perhaps the most significant
reform that has taken place in the capital market in our country. As per SEBI regulations,
any public limited company coming out with an issue of equity shares has to issue shares to
its shareholders in the "demat" form only and not in the physical form. An applicant for
equity share has however the option of getting shares in the physical form but he cannot
trade in the secondary market in the physical form. He has to exchange the physical
shares for demat shares.
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At present, there are two Depository institutions in India. They are:

National Securities Depositories Limited (NSDL) promoted mainly by the NSE and
Central Depository Services Limited (CDSL) promoted mainly by the BSE.
All public limited companies in the private sector have to choose one of them for handling
the demat shares at the Apex level (all India). The companies enter into suitable
agreements with NSDL or CDSL. Both these depositories are duly registered with the
SEBI. Under the depositories come "depository participants". Who can be a DP?
 A Scheduled Bank
 A Financial Institution (FI)
 A Foreign Institutional Investor (FII)
 A share broking firm/company
At present, we have more than 300 DPs in India.
What is the main function of the DP?

A DP maintains the Electronic Share Account (E.S. A/C) of an equity shareowner of any
public limited company. This account is also referred to as "beneficiary's account". Any
person who owns shares and is desirous of trading in shares in the secondary market has
to get the E.S. A/C opened with a DP of his choice. He first surrenders the share
certificate (physical form) against acknowledgement. The DP then forwards this share
certificate to the Registrar who handles dematerialisation of physical shares. He
dematerialises the shares and confirms with the DP. The DP then opens the E.S. A/C in
the name of the shareholder and issues a passbook and a book that looks like a
chequebook. It contains leaves with counterfoils that the shareholder can use for selling
shares.
Once a leaf is issued for sale of demat shares, the transaction is put through the share
broker through a recognised Stock Exchange and the shareholder gets his money from
the buyer. His E.S. A/C is debited and personal bank account is credited. Similarly, the
buyer's personal bank account is debited and E.S. A/C is credited. With the introduction
of demat shares, trading can be done even in a single share, if needed. The concept of
market lot (which was until recently, 100) has disappeared.
The companies whose scrip is dematerialised, will get periodic statements from all the
depositories showing the ownership of “demat” shares for the purpose of dividend, bonus
shares, rights shares etc.
Settlement period – For administrative purposes, stock exchanges divide the year into a
number of settlement periods which are usually of one week duration or at the most of
two weeks duration. A securities transaction in cash list has to be settled within one
settlement period and a security in the forward list can be carried forward to the next
settlement period. Recently NSE as well as BSE have introduced what is called "rolling
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settlement". This means "any time" buy and "any time" sale. This is possible because of
"screen based" trading in the place of "ring" trading.
Stock option – It is the right to buy or sell a share at a particular price within a particular
period, in order to hedge the investment. Nowadays issuing shares instead of share in
profits or as part of remuneration package, especially in the IT industry, is quite common
in India. SEBI
has issued regulations in this regard. As employees are involved in this, it is often
referred to as "Employees' stock option" (ESOP)
Volatile – A share subject to frequent and violent fluctuations is said to be volatile. If

the volatility of a share is due to inherent factors like variability in its earnings, smallness
of the issue, it is measured by the Alpha Factor. However, if the volatility is market
related, it is measured by the Beta Factor.
Volatility – A measurement of the volatility rate (but not the direction) of the change in
price over a given period.
Z security - It is of recent origin in India. This refers to a group of securities (equity

shares) of companies that are defaulting in compliance with requirements of the stock
exchanges on which its shares are listed. It also could be a company about which repeated
complaints are being received from its investors.
*** End of Part II of course material ***
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What are Derivatives ?
Derivative is an instrument that derives its value from an underlying asset. The asset
could be "commodity", "share/debenture" or "currency". For example, we enter into a
contract for purchasing US Dollar from a prospective seller, in exchange for Indian
Rupees, at Rs.48.00 on 20/03/2001 - 1000 US Dollars. This is called a "derivative".
The derivative used in Finance and Banking is called a "financial derivative". Financial
derivative is based on a "financial asset". Financial asset is different from any fixed
asset like building etc. A financial asset is money receivable by the asset holder due to
any one or more of the following:
Receivable due to sale of service
Receivable due to sale of goods
Receivable due to lending
What could be the objective of a derivative in general?
To minimise cost of borrowing by locking into a suitable interest rate, especially when
the market is going through increase in interest rates - Example - Fixed rate
borrowing for more than one year, when the market rates are expected to go up.
Floating rate of borrowing for more than one year, when the market rates are
expected to come down. A switch from fixed rate into floating rate, in case the
market conditions change. This is called "interest rate swap".
To minimise risk associated with acquiring an asset in terms of availability and cost in
future - You want to buy ACC shares 2 months later, say, at 1000/- per share. The
present market rate is Rs.950/-. You expect the rate to go up to Rs.1100/- two
months hence. You are on the look out for a prospective seller who would sell to you at
a price less than this amount. You get a seller who is prepared to sell to you at say,
Rs.1050/-. This price is acceptable to you. Both of you enter into a contract and this
contract is called "futures contract". How does it happen that somebody is prepared
to sell it at Rs.1050/- when you expect it to go up. This is exactly what the market is
about. Perceptions about future rate movements would differ from person to
person. In the instant case, you perceive it to go up, whereas the seller
perceives it to come down. Further he may require the money very urgently and
badly.
To be in a better position to manage liability of loan, especially if the borrowing is in

foreign currency by managing foreign exchange risk - Example - You want US Dollars
1000 three months hence. The present Exchange Rate is 1 US Dollar = Rs.46.50. The
market is "bullish" on US Dollar. You expect the Exchange Rate to go up substantially.
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Hence you are exposed to Exchange Risk three hence months hence. You expect the
US Dollar to go up to Rs.49/-. The Bank with whom you are dealing is prepared to sell
three months later (known as "forward sale") 1 US Dollar @ Rs.48.50. You want to fix
the Exchange Rate just now and accordingly enter into a contract with the bank. This
is known as "forward sale contract".
There is one more product besides the above, called "option". This is an improvement
on "futures". In case, one of the parties to any of the contracts as above wants to
cancel the contract, he has to compensate the other party to the contract. In the
case of an "option contract", for payment of a small premium, known as "option
premium", the purchaser of the option contract acquires the "Right" but not the
"obligation" to go through the contract. The writer of the contract is the seller and
the holder of the contract is the purchaser. The writer receives the premium from
the purchaser. This is quite often used in "bonds" issued by Corporations, Companies
etc. We will see more of it later.
Now let us examine futures, swaps and options in detail.
Future Contracts
A future contract is an agreement between a seller and a buyer that calls for the
seller (called the short) to deliver to the buyer a specified quantity and the grade of
an identified commodity/financial value, at a fixed time in future, and at a price
agreed into when the contract is entered into. These are contracts are traded
through an Exchange, standardized by the Exchange and guaranteed by a Clearing
Corporation. Sometimes the contract is settled in cash value of the underlying.
The principal features of futures contract are:
• Futures contracts are traded on organised exchanges , so sellers and buyers

are not directly known to each other.
• Future contracts have standardised contract terms and periods. Generally
future contracts are traded with expiration/ settlement period of one month ,
two months up till an year. Each month's contract is considered as a separate
series and mostly maturity is in last week of the month. A open contract can
also be closed before expiry by squaring off the position in the same series.
• Futures segment has two-tier structure. A futures exchange where trading is
done and a clearing house which undertakes clearing and settlement of all the
executed trades on the exchange and also guarantees the fulfillment of the
futures contracts by way of margins and trade guarantee funds..
• Both exchange and clearing house have separate membership requirement. Thus
a Trading Member, who is a member of the exchange, can choose to be member
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of the clearing house or else associate with a clearing member, who is member
of clearing house, for the settlement of trading members trades.
• Futures trading require margin payment by clearing members, i.e., the share
brokers, who in turn can collect the same from their clients and settlement of
trade takes place on a daily basis.
• Mark-to-market: At the end of each trading session, all outstanding contracts
are repriced at the settlement price of that trading session. This would mean
that some participants would make a loss while others would stand to gain. The
exchange adjusts this by debiting the margin accounts of losers and crediting
margin accounts of gainers. In effect, its a zero sum market where some
participants gain at the cost of losers.
• Actual delivery is rare as most of the futures contract are offset by equally
opposite contracts.
Index Futures:
The index futures are the most popular futures contracts as they can be used in a
variety of ways by various participants in the market. They offer different users
different opportunities like hedging , speculation etc. Index futures derive its value
from the underlying basket of index of securities. Generally popular indices, such as
Sensex, Nifty etc. can be traded as they are reflective of market sentiments and
mirror the movement of any fund's portfolio.
To explain it simply, suppose one wants to trade in futures contracts, say Nifty Index
Futures. One can place orders through his broker to buy or sell Nifty contract (min
contract size for Nifty is 200, so orders should be in multiple of 200) for any
particular month (series). Before placing the order one has to place some amount as
initial margin which can be a percentage of the value of his position. In exchange,
different prices shall quoted for all the series of one two or three months of
maturity. Suppose July, Aug and September series are traded at 1500, 1505 and 1515
respectively. An investor decides to buy 200 Nifty of August series at Rs. 1505 on
July 07. This contract will remain a long (open) till the maturity of August series on
31-Aug-2000. This open position can be squared off by selling similar 200 Aug series
on any day before maturity. Suppose on July 12, the quoted price of Aug series is
1550 and the investor chooses to close his position by selling 200 Nifty, then his cash
flow or profit will be Rs 9000/- {( 1550-1505 ) * 200}. This cash flow shall be received
in form of every day marked-to-market profit or loss. Each day his open contract will
be marked at that day's closing price of the series. So next day his carried forward
price will be taken as previous days closing.
E.g cash flow for 200 buy Aug. series is:

Date Buy/CF price closing /Sell MTM
07-JUL 1505 1525 +4000
10-JUL 1525 1535 +2000
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11-JUL 1535 1530 - 1000
12-JUL 1530 1550 +4000
NET MTM : +9000
After the investor has squared off his position he will receive a profit of Rs 9000/-
as well as the initial margin deposited earlier with his broker. Initial margin could be
10% of the value of his position i.e Rs 30000/- approximately. ( 0.1 * 200 * 1505)
Options
Options are similar to futures contract but it gives its holder the right (but not the
obligation) to buy (known as "call option") or sell (known as "put option") securities at
a pre-determined price (known as "strike price" or "exercise price"), within or at the
end of a specified period (known as "expiration period"). So an "Option holder" may or
may not exercise his rights depending on the prevailing market conditions in future. In
order to acquire the right of option, the option buyer pays to the option seller (known
as "option writer") an Option Premium, which is the price paid for this right. The
buyer of an option can lose no more than the option premium paid but his possible gain
in unlimited. On the other hand, the option writer's possible loss is unlimited but his
maximum gain is limited to the "option premium" charged by him to the holder.
Therefore payoff in options is assymetric. The most critical aspect of options
contracts is the evaluation of the fairness of option premium, i.e. option pricing. Most
often, options go unexercised.
American options are exercisable at any time prior to expiration date while European
options can be exercised only at the expiration date. Expiration can be similar to that
of futures i.e one month, two-month and three-month. For the call option holder, it is
worthwhile to exercise the right only if the price of the underlying securities/asset
rises above the exercise price. For the put option holder, it is worthwhile to exercise
the right only if the price falls below the exercise price. There can be options on
commodities, currencies, securities, Stock Index, individual stocks and even on
futures. Options strategies can be highly complicated.
Swaps
Financial swaps are a funding technique, which allows the flexibility of exchanging the
mode of cash flow pay off on a notional predetermined asset. E.g., "Exchange" of
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"Fixed interest" pay off for a "Floating interest" pay-off on a fixed notional
principal amount. It permits a borrower to access one market and then exchange the
liability for another type of liability. The global financial markets present borrowers
and investors with a wide variety of financing and investment vehicles in terms of
currency and type of coupon - fixed or floating. Floating rates are tied to an index
which could be the London Inter-Bank borrowing rate (LIBOR), US treasury bill rate
etc. This helps the investors exchange one type of asset for another for a preferred
stream of cash flows. Swaps by themselves are not a funding instrument; they are a
device to obtain the desired form of financing indirectly. The borrower might
otherwise have found this too expensive or even inaccessible.
All swaps involve exchange of a series of periodic payments between two parties. A
swap transaction usually involves an intermediary who is a large international financial
institution. The two payment streams are estimated to have identical present values
at the outset when discounted at the respective cost of funds in the relevant
markets.
Types of Swaps
The two most widely prevalent types of swaps are interest rate swaps and currency
swaps. A third is a combination of the two to result in cross-currency interest rate
swaps. Of course, a number of variations are possible under each of these major types
of swaps.
Interest Rate Swaps

An interest rate swap as the name suggests involving an exchange of different
payment streams, which fixed and floating in nature. Such an exchange is referred to
as an exchange of borrowings or a coupon swap. In this, one party, B, agrees to pay to
the other party, A, cash flows equal to interest at a predetermined fixed rate on a
notional principal for a number of years. At the same time, party 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. The life of the swap can range from two years to over 15 years. This
type of a standard fixed to floating rate swap is also called a "plain vanilla swap" in
the market jargon.
Currency Swaps
Currency swaps involves exchanging principal and fixed rate interest payments on a
loan in one currency for principal and fixed rate interest payments on an
approximately equivalent loan in another currency. Suppose that a company A and
company B are offered the fixed five-year rates of interest in U.S. dollars and
sterling. Also suppose that sterling rates are generally higher than the dollar rates.
Also, company A enjoys a better credit worthiness than company B as it is offered
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better rates on both dollar and sterling. What is important to the trader who
structures the swap deal is that difference in the rates offered to the companies on
both currencies is not the same. Therefore, though company A has a better deal in
both the currency markets, company B does enjoy a comparatively lower disadvantage
in one of the markets. This creates an ideal situation for a currency swap. The deal
could be structured such that company B borrows in the market in which it has a lower
disadvantage and company A in which it has a higher advantage. They swap to achieve
the desired currency to the benefit of all concerned.
A point to note is that the principal must be specified at the outset for each of the
currencies. The principal amounts are usually exchanged at the beginning and the end
of the life of the swap. They are chosen such that they are equal at the exchange
rate at the beginning of the life of the swap.
Market Participants
Exchanges: Derivatives are traded on Exchanges , which perform two functions : 1)

provide and maintain market place to enter into a contract 2) Police and enforce
ethical and financial standards applicable on exchange.
Trading Member (T.M): Trading Member performs functions similar to a brokerage

house in the securities industry. All trades has to routed through a TM and they
collect margins from their clients for their positions .
Clearing member (C.M): It acts as an intermediary between clearing house and the
clients or non-clearing member TM's.
Clearing Corporation: They perform the vital function of clearing the transactions on
the exchanges. Unlike clearing houses in security market , they guarantee the trades
by acting as a counter party to the trade. For precaution , a margin is maintained on a
mark-to-market basis everyday besides the initial margin.
Regulatory Authorities : Future Markets have self-regulatory and central regulatory

authorities. They perform the function of market surveillance and keep a vigil on
market manipulations.
Traders/Clients : They are the users of derivative market and take specific positions
depending on their purpose viz . Hedging , Speculation etc.
*** End of Document ***
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Part III - Foreign Exchange
1. Foreign Exchange is a commodity just like any other commodity like grain etc.
2. It is internationally considered a perfect market - characteristic feature of a perfect
market is that only demand and supply influence the prices. Foreign Exchange rates
across the world are generally influenced by this factor relating to any currency, at a
given time, in the market.
3. Internationally, it is a highly speculative market. More than 90% of the transactions
are for reasons of speculation and not backed by what is known as "Genuine Merchant
Transactions" (GMT). In India, it is to be backed always by GMT, as per the Exchange
Control Regulations of the RBI under FEMA. GMT could be for trade or services.
4. Corporations, brokers, dealers, banks, institutions, private funds like pensions funds,
insurance funds, provident funds, Soros funds etc. take part in this market. As there
are no restrictions in holding foreign exchange by these players, they indulge in it
freely and take advantage of expected price fluctuations of various currencies.
5. The RBI is primarily responsible for regulating the Forex market as well as the
Foreign Exchange Reserves in India. Exchange Control Regulations set ceiling on the
amount of FX to be released by an Authorised Dealer (AD) for various purposes
including business travel abroad.
6. FX Reserves are constituted by:
Gold Reserves with the RBI
Special Drawing Rights of India as sanctioned by IMF
Balances kept with other Central Banks in the world by the RBI
Balances kept outside India by the banks
Investment in FX bills, bonds by the Central Banking Authority in India, Indian
Banks, Financial Institutions etc.
(*It should be noted that the FX held by Indian Companies in the private sector in
their own names is not part of FX Reserves of the country)
7. Indian Resident cannot hold FX excepting up to US Dollars 2000 by way of gift, inward
remittance etc. Anything in excess that he or she holds, should be surrendered to an
AD.
8. In the case of any inward remittance for export of goods or services, gift, periodic
remittance from NRIs abroad, loan taken, dividend etc., FX is credited to the
NOSTRO Account of the AD or the Indian Company that is permitted to have
NOSTRO Account in its own name. Similarly in the case of any outward remittance for
import of goods or services, remittance of royalty, interest on FX Loans, dividend etc.
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FX is debited to the NOSTRO Account of the AD or the Indian Company as the case
may be.
9. When the NOSTRO Account is credited on behalf of its customer, the AD gets an
advice from its Correspondent abroad and converts the FX into Indian Rupees at the
prevailing market rate. Similarly in the case of import, first the AD recovers Indian
Rupees from its customer on whose behalf remittance is to be done. Then only, it
advises its Correspondent abroad to debit its NOSTRO Account and effect
remittance in favour of the foreign beneficiary.
10. All the A.D.s in India are members of a non-profit organisation known as "Foreign
Exchange Dealers' Association of India" (FEDAI). It functions as a watchdog for the
RBI.
11. At present the Indian Banks dealing in FX transactions can deal in 26 permitted
currencies. The major currencies are:
American Dollars Swiss Francs
Australian Dollars British Pounds
New Zealand Dollars Deutsche Mark of Germany
Singapore Dollars Japanese Yen
Hong Kong Dollars Italian Lira
Swedish Kroners French Francs
Dutch Gilders Canadian Dollars
Similarly Foreign Banks would also have NOSTRO Indian Rupee Deposit Accounts with
their counterpart in India. The Foreign Banks, however, have limited utility for Indian
Rupee and hence their Indian Rupee Deposits would be minimum.
12. Correspondent Banking arrangement is on a reciprocal basis. The Foreign
Correspondent Bank extends the following services:
Sending intimation to the Indian Bank whenever its NOSTRO Account is credited
with all relevant details;
Sending periodic statement of all NOSTRO Accounts maintained by it for the
purpose of records and reconciliation;
Acting on instructions by the Indian Bank to debit the NOSTRO Account and
effect remittance to the foreign beneficiary.
At times, if needed, buy FX on behalf of the Indian Bank and credit the same to
the NOSTRO Account. It will recover this amount from subsequent credits to the
NOSTRO Account.
13.At present in India, even A.D.s are permitted to hold FX beyond what is required
by GMT contracts with its customers, up to a prescribed limit. The RBI prescribes
this limit. The quantum is less than US Dollars 10 Million.
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14.A.D.s are permitted to hold Foreign TCs and foreign currency up to a prescribed
limit by the RBI.
15. As per prevalent Exchange Control Regulations in India, Foreign Exchange is required
to be credited to the NOSTRO Account of the exporter (in case it has been permitted
by the RBI) or the AD within 180 days from the date of shipment. Similarly, in the
case of imports, the payment is required to be made within the same period of 180
days from the date of shipment by debiting the NOSTRO A/C of the importer or the
AD as the case may be.
16.Indian Rupee is not freely convertible into any other foreign currency. Hence it is
said that Indian Rupee is not convertible on current account or capital account fully.
There are restrictions by the RBI. Current account means - trade of goods and
services, remittance for interest, dividend, royalty, etc. Capital account means -
portfolio investment by the Foreign Institutional Investors (FII), equity investment in
projects, Foreign Currency Loans, Lines of Credit both for import and export, gifts
from one nation to another nation etc. Even Banks in India have to operate for loan,
investment abroad etc. within prescribed limits by the RBI. As mentioned earlier, on a
selective basis, the RBI permits Indian Companies to have their own NOSTRO
accounts abroad. Indian Residents are not permitted to have any asset abroad.
17.At present, 100% Export-oriented units (EOU), in India can retain up to 35% of
their earnings in FX, while others who are not 100% EOU, can retain up to 25% of
their earnings in FX. Recently, to tide over the crisis in the FX market when the US
Dollar was galloping unchecked, RBI had reduced the % holding from 100% to 35%.
18.FX rates given on a daily basis from Monday thru' Friday in India are not regulated
by the RBI. They are by and large decided by the demand and supply in the FX market
of any given currency. At present, US Dollar is being used as "reference currency".
Hence, the FX rate of US Dollar vis-à-vis Indian Rupee is taken as the base rate for
determining the FX rates for other currencies. For example, let us say, 1 US Dollar =
Rs. 46.30. and 1 US Dollar = Stg. Pound 0.667. Hence, 1 Stg. Pound = Rs.69.41. Such a
derivation is called a "cross currency" quotation.
19.The RBI in its capacity as the Apex Bank in the country does intervene in the FX
market to stabilise it. The respective Central Banking Authorities do this all over the
world. However, the impact of the Central Bank's intervention depends upon the
volume of the FX market in the respective country; the larger the volume the less the
impact and the less the volume, the greater the impact. The RBI sells FX in the Indian
market if it requires cooling the overheated market due to excessive demand over
supply. Similarly the RBI purchases FX, thereby creating artificial demand in case it
feels that the FX rate of any specific currency is below an acceptable level.
20. Although the A.D.s enter into FX contracts with its customers, the actual
deals are put through at the dealing room of the A.D. These specialised branches
alone can operate the NOSTRO accounts maintained abroad. They are distributed
geographically over the country to facilitate smooth operations any time. For example,
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a commercial bank of the size of the SBI will have 20 dealing rooms, at the most.
They are maintaining the position of FX and hence called at times, "position
maintaining branches". They report the position directly to RBI and the respective
Head offices. The A.D.s as and when they sell or purchase FX on behalf of their
customers, should report to the dealing room, under whose jurisdiction they operate.
21.In Europe, there is a common currency called "Euro". Some of the leading European
nations are not members of the Euro, like the UK. However, till end 2001, transactions
with the member countries, which have adopted Euro, can be done either in their
respective Domestic Currency or Euro, as it suits the customer.
22. Suppose you are Deutsche Bank in Germany. Although you may hold deposits
in other currencies, while reporting figures in your financial statements, you will be
required to convert it into Domestic Currency namely, Deutsche Mark.
23. You are required to maintain FX accounts in various currencies. For each
currency, you will open a separate ledger account. End of the period balances will be
converted by applying direct rate (if available) or Cross Currency rates (if direct rate
is not available) into Domestic Currency/Local Currency. For transactions with
customers, depending upon the currency of transaction, the respective currency
deposit account is credited or debited as the case may be, while recovering or paying
the local currency to its customers.
*** End of the note ***
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Part IV - Fixed Income Securities
The word "security" refers to an asset that is offered by a borrower to a lender at the
time of taking a loan. On the other hand, the word "securities" means instruments like
"shares", "debentures", "bonds" etc. Securities are the means in the hands of "Resource
Mobilisers" for raising resources from those who give financial resources to them, in
exchange for securities issued by them in the form of share certificate etc.
When we refer to "Fixed Income Securities" ("FIS" hereafter), we mean instruments

that give fixed income to its investors. The income does not vary from period to period, as
say in the case of investment in equity share capital. In the case of "equity share", the
dividend could vary from time to time, unlike "preference share capital (hereafter
referred to as "preferred equity"). Equity shares do not come under FIS.
Constituents of FIS:
Bonds
Debentures
Preferred Equity
Mortgage Backed Securities
Asset Backed Securities
We will examine each one of them briefly.
Bonds
 Can be issued by Governments, Public Sector Undertakings, Municipal Corporations,

Companies, Banking Institutions, Financial Institutions, Non-Banking Finance Companies
etc.
 If it is up to a period of 5 years, it is sometimes referred to as "Notes". If they have
floating rate of interest, they are not a part of FIS. Federal Bank of the US on behalf
of the US Government issues such notes. They are called Treasury Notes. This is not
the practice in India. The Reserve Bank of India issues only Treasury Bills up to 1 year
maturity
 Can be secured with fixed assets or current assets or both
 Can be face value instrument (amount of investment = amount payable on maturity) or
discounted value instrument (amount of investment = Discounted value of amount
payable on maturity)
 Can be for periods from 3 years to 25/30 years. In case period is longer, it is called
"Deep Discounted Bonds"
 In India it is an emerging market, whereas bond market is a very well developed
market
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 Has a fixed rate of interest mentioned in the case of face value instrument, which is
called the "coupon rate"
 Can be cumulative (interest paid on maturity) or non-cumulative (interest paid
periodically)
 Can be converted into equity shares (called convertible bonds) - conversion option, not
to be confused with redemption option through "call" and "put" options
 In the case of Discounted Bonds, some instruments do not carry any rate and hence
are called "Zero Coupon Bonds". Only the amount payable on maturity is mentioned.
 It can be redeemed with premium
 It can have options (refer to note on "derivatives"), both call (for the issuer for early
redemption) and put (for the investor to offer for early redemption)
Debentures
Χ Can be issued by Financial Institutions, Non-Banking Financial Companies, Companies

etc. Very rarely issued by Govt. Bodies and seldom by Governments, Municipal
Corporations, Banking Institutions etc.
Χ Is always a face value instrument
Χ In India it is by and large secured with fixed assets or current assets or both
Χ Can be cumulative or non-cumulative
Χ Can be convertible into equity shares
Χ Has a fixed coupon rate mentioned on the certificate
Χ Has a limited secondary market, but overall it is better established than the emerging
bond market in India. It is expected that in the near future, to keep up with the global
practice, the bond market will replace the debenture market
Χ Options are rare in debentures
Χ Redemption premium can be there
Preferred Equity
 It is the same as what we, in India, call as "Preference Share Capital"

 It is a fixed income security, as the rate of dividend is fixed on the certificate,
irrespective of the rate of dividend on the "equity capital"
 It can be converted into equity at a later date
 The difference between interest on bonds and debentures and dividend that is paid on
preferred equity is that interest is an expense, whereas dividend is part of profit
after tax distribution
 Preferred equity can be paid back to the investor regularly in accordance with the
relevant provisions of The Companies Act (as the Act is known in India - known by
different names in different countries)
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 It is called "preferred equity" as it gets preference for payment of dividend and
repayment once the company closes, over the "equity capital"
 Has a limited secondary market
 Is not mandatory (legally compulsory in terms of provisions of The Companies Act) to
have it as capital, unlike "Equity", which is compulsory for all limited companies
 It forms a small portion of the total share capital in most of the cases.
Mortgage Backed Security
 As the name suggests, its cash flow (cash coming in for paying back the investor or
paying periodic interest) is linked to cash flows of an underlying pool of mortgages
 There are three types - Mortgage Pass Through Certificates (known as "PTC"),
Collateralised Mortgage Obligations (CMO), and stripped mortgage backed securities.
 Mortgage is the legal term of offering immovable fixed assets of land and building as
security
 It has mortgage loan receivables (repayment by the borrowers) as the underlying
receivables for cash flow
 PTC - Against the pool of mortgage receivables, the lenders raise further resources by
issuing Pass Through Certificates or Shares (mostly of preferred equity nature) to the
investors. Repayment to the investors linked to the cash flowing in from mortgage
receivables. The pool may consist of a number of mortgage loans and the lenders may
be more than one.
 CMO - Against the pool of mortgage receivables, the lenders raise further resources
by issuing bonds of different interest rates and redemption priority/dates. This is the
most common type of Mortgage Backed Security. The "Z" class bond doesn't even get
periodic interest in some cases till after the redemption of other class bonds.
Obviously, the rate of interest will be higher.
 The "Stripped" variety is not very popular in the US itself. It is complex in structure.
 Rate of interest is flexible and market driven. It is mostly a fixed rate.
 Risk is less as cash flows are linked to cash flows from the pool of receivables
 These have a reasonable secondary market in the Western world but it is still "novel"
in India.
Asset Backed Securities
Χ These have the backing of securities other than mortgages, like credit card
receivables, consumer durable loan receivables, car loan receivables etc.
Χ These form a small segment of the financial market
Χ This market is emerging
Χ Very limited secondary market
Χ Still considered very risky especially against pool of credit card receivables
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Χ Not yet made its presence in India
Χ Have a fixed rate of interest
Secondary market for these securities and Clearing/Settlement system
Each country or an integrated Euro system consisting of more than one country has got its
own clearing organisations who ensure that the ownership of securities traded is smoothly
transferred from the original owner to the new owner. This should not be confused with
the Stock Exchanges. Stock Exchanges function to provide a platform for trading in
securities in the secondary market. They come under the respective statutory
organisation like SEBI in India. They do not handle registration of security in the new
owner's name etc. The sale/buy transactions are put through Stock Exchanges. The share
brokers handle the sale/buy contracts through Stock Exchanges. In all the Stock
Exchanges excepting NSE, there is a clearing system and a bank attached to it, for
enabling transfer of security and settlement of dues. However the NSE does not have any
place of operation. Hence it has an exclusive clearing and settlement system as described
below.
NSE's exclusive clearing and settlement organisation is the National Securities Clearing
Corporation Limited (NSCCL). This is based on similar organisations abroad. This is a
wholly owned subsidiary of the National Stock Exchange and provides the means for
exchange of securities and settlement of payment between seller and buyer in the
secondary market, for contracts that are put through the NSE.
The operations are:

Broker A - sell broker for Customer P
Broker B - buy broker for Customer Q
There will be contracts between the brokers and their customers
The brokers go through NSE for transacting. Assume that they agree on the price for the
transaction and in turn enter into contract. This contract is registered with the NSE.
NSE like any other stock Exchange provides the platform for putting through the
transaction in this case.
Exchange of money and exchange of security are yet to take place. This is the role of
NSCCL. Once the contract is registered with the NSE, NSCCL comes in the picture. It
ensures that the security is transferred from broker A to broker B and funds are
transferred from broker B to broker A.
The brokers in the first place, would get the security and funds from their respective
customers. Broker A will get the security from Customer P whereas Broker B gets funds
from Customer Q. This is how clearing of securities and settlement take place in the
secondary market.
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In India, as explained under the Capital Market Terms, SEBI's regulations regarding
securities that they should only be in "Demat" form apply only to the shares of Limited
Companies. The "demat" form is yet to be introduced in a big way for debt instruments
like "debentures" or "bonds", for Limited Companies. However, most of the Government
securities, and Public Sector Corporation Bonds have been in the "demat" form to a large
extent. The Depository Participant dealing with the Government Securities and PSU bonds
is the Stock Holding Corporation of India Limited (SHCIL).
The clearing organisations in Europe are the most popular as they cover operations in more
than one country. The two organisations are - CEDEL or Euro Clear. A broker can be a
member of either of the organisations. Hence there is an arrangement for transaction
involving both of them, called the "bridge".
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Part IV - Money Markets and Instruments
Money market refers to the short-term market, say up to 12 months. There is no fixed
place for this market. The note discusses only such instruments as are having secondary
market. Instruments like inter-corporate deposits and fixed deposits within 12 months,
although belonging to the short-term debt market, have been excluded in view of this
criterion only.
Money market instruments are as under:
♦ Treasury bills of the Government of India through Reserve Bank of India;

♦ Certificate of deposits raised by banks depending upon their requirement for large
amounts;
♦ Commercial paper floated by Limited Companies to augment their working capital
resources or reduce the cost of borrowing;
♦ Call money market;
♦ Commercial bills discounted ( in some cases, co-accepted by the buyers’ banks) and
Treasury bills:
It is the short-term instrument issued by the Government to tide over short-term

liquidity problems. This is usually resorted to for mobilising resources in the short-term
to plug the budget deficit. Characteristic features of treasury bills are as under:
 Highly liquid as anytime it can be liquidated by getting the bills rediscounted with
another investor or DFHI (Discount and Finance House of India) even before
redemption date;
 Highly reliable as Government is involved and hence no risk is involved;
 Reserve Bank of India is the agent for Govt. of India.
 Issued by RBI either through auction or tap – adhoc treasury bills have been
discontinued;
 Currently the periods for which RBI raises resources through TBs are 14 days, 91
days, 182 days and 364 days.
 Treasury bills are discounted instruments with the face value being realised on
maturity only. Hence, if the market rate increases for short-term maturity and
accordingly RBI is forced to offer a higher yield to TB investors, the amount that
they will collect will be less – the higher the rate offered, the less the amount
collected and vice-versa; Investors:
Institutions like banks, FIs, NBFCs, Insurance Companies, Mutual Funds, State
Governments, High Net Worth individuals, Limited companies and even the Reserve
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Bank of India (whenever the amount declared during the auction is not fully subscribed
and the balance amount devolves on them);
There are rediscounting facilities available for these treasury bills in case the
investor wants to liquidate them either through Discount and Finance House of India
Limited (DFHI) or by RBI, as the case may be;
 If private investors are involved, certificates are issued for the treasury bills and in
case of investment by Institutions, Governments and the RBI itself, their treasury
bills accounts are maintained in the form of “Subsidiary General Ledger Accounts”
with RBI. In these cases, as regular purchase and sale take place, certificates are not
issued to the investors. This is the earliest example of securities in "demat" form;
 Treasury bill yield is on 365 days calculation. If the TB is held till maturity, the return
on it is called "Yield To Maturity (YTM)";
 The auctioned treasury bills do offer the best rate of return to the investor and
treasury bills on tap get the lowest rate of interest among the types of treasury bills
and
 Internationally, the respective Central Banks have treasury notes (up to 5/7 years) as
well as treasury bonds (up to 30 years). We have only up to 1 year at present.
Yield on treasury bills:
It is always calculated on 365 days basis irrespective of the period of the bill, say 14
days, 91 days etc. The following example will illustrate this.
Suppose there is a 91day bill for Rs.100000/-. As TB is a discounted value instrument, in

case RBI is able to get Rs. 97,500/- (net of discount). This means that the investor has
got Rs.2,300/- on net investment up front. Hence the calculation on a 365 days basis
would be:
(1,00,000/97500) - 1 = yield in decimals for 91 days. Then we will have to convert into
yield on 365 days basis.
Yield for 91 days = 0.0256 or 2.56% for 91 days
Hence yield for 365 days = (2.56) x 365/91 = 10.26% p.a.
The yield goes on reducing as the TB goes towards maturity date. Thus on every
successive discounting, the yield gets reduced. It is related to two parameters as under:
Remainder period for maturity
Discounted value paid by the new investor
Certificate of deposits:
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This is more of an investment instrument for those having investible surplus, rather than
an instrument for market borrowing. At present only Commercial banks have been
permitted by the RBI to issue certificates of deposits depending on their requirement of
funds in the short term up to 12 months by offering a higher rate of interest than on the
regular deposits. In the international market, however, Limited Companies can issue
certificates of deposit. Most of the developed countries do not have the fixed deposits
system that we have in India.
Characteristic features of C.D.s:
Minimum maturity 1 month;

Maximum maturity 12 months;
They are negotiable instruments unlike the conventional fixed deposits;
C.D.s can be issued up to 5% of their total deposits;
High Net Worth Individuals, Limited Companies, Trusts etc. do invest in these
instruments;
They are issued at discount rate with the value of the deposit payable on maturity;
Rate of interest to be determined by the individual banks and not controlled by the RBI;
Issued in multiples of 5 lacs subject to a minimum of 10lacs and
They are freely transferable by endorsement and delivery but only after 45 days from
the date of issue.
Note: It should be borne in mind that the terms keep on changing either depending upon
the market conditions or RBI directives. Please keep yourselves updated on the latest
terms instead of entirely depending upon the details given here.
Certificate of deposit is not a very popular instrument in the market at present. This is so
because most of the banks are not experiencing any liquidity problem in the short-run.
Yield to maturity - also calculated on 365 days basis just like in the case of TBs
Commercial Paper (C.P.):
Commercial papers are short term unsecured promissory notes issued at a discount value
by large and well-established Limited Companies. The principal requirement is that the
commercial paper issued by them should have the prescribed minimum credit rating by the
RBI. It is a part of their working capital funds and to the extent of commercial paper
borrowing, their working capital limits with the banks are reduced. As even today in India,
the commercial banks’ lending for working capital purposes is significant, their permission
is a must for issuing C.P.s. They are either issued directly to the investors or through
merchant banks and security houses. The instrument has been welcome especially by the
Limited Companies, who have been doing well. This is because their cost of borrowing in
the short-term is reduced significantly, because the C.P. is always at a lower rate of
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interest than the rate of interest on working capital limits charged by the banks. Besides
Limited Companies, NBFCs are permitted to issue commercial paper.
Of late, even financial institutions have started issuing commercial paper and some of the
public sector undertakings too. However the guidelines if any, issued in these cases,
are not available to the author of this hand out.
Yield to maturity - calculated on 365 days basis just as in the case of TB/COD.
Call money market:
It is a part of the national money market where day-to-day surplus funds, mostly of
banks, are traded. The call money loans are of very short-term in nature and the maturity
periods of these loans vary from 1 to 3 days. If the period exceeds 3 days, a notice is
required to be given about repayment of the loan at the time of taking the loan. As notice
is given, this is called "notice money market". The maximum period is 14 days for notice
money market.
Purpose:
The banks to meet various urgent requirements for funds as under resort to borrowing in
the call money market as under:
Fill the temporary gaps in their deposit maturities in the case of over lending or
overdue or premature payment of deposits of large amounts;
Meet the Cash Reserve Ratio (CRR) requirements with RBI;
Banks usually borrow to avoid any penalty from RBI for not meeting the CRR
requirements.
Participants:
Borrowers:
Only Commercial banks.
Lenders:
Other Commercial banks, Insurance Companies, Financial Institutions, Mutual Funds
etc. Limited Companies cannot participate in this market.
Note: Call money market rates fluctuate very much and this rate is used as an indicator
for gauging the level of liquidity in the money market. If the rates firm up, it indicates
tight money supply and vice-versa.
Rate of interest for Call Money Market operations quoted on p.a. basis
Bills discounted:
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These are the commercial bills of Limited Companies or business houses drawn on buyers
and duly accepted by them. In some of the cases, the lender does insist on the co-
acceptance of the bankers to the corporate or business house, as the case may be. This
means that this borrowing is done with the full knowledge of the banks that have lent
working capital funds to the Limited Companies. This is a highly unorganised market with
no ground rules for operations. There is not much of a secondary market for bills
discounted in India at present. This market has yet to develop in India; otherwise in the
developed financial markets, the bills discounted constitute a sizeable portion of the
financial markets. The number of times the bills discounted once get discounted in the
international market is much higher than what is prevalent in India.
There is an added risk element in the bills discounting from the lender's point of view.
This is the possibility that genuine trade may not have taken place. In such cases, the bills
are called "accommodation bills". The borrowers are:
Limited Companies whose working capital is blocked due to outstanding trade bills.
The lenders are:

Commercial Banks, All-India Financial Institutions, NBFCs, Insurance Companies,
UTI/other mutual funds, State and other co-operative banks etc.
Rates entirely depend upon the lender and to an extent are influenced by the credit rating
of the drawer as well as the drawee, besides the liquidity in the market. Nowadays, in
view of the fiasco in the Inter-Corporate Deposit (ICD) market, this market has also been
affected to a large extent. The lenders have started insisting upon “post dated cheques”
from the drawees besides their banks’ approval in some cases.
In the past, the commercial banks used to get the bills discounted by them, rediscounted
with the RBI. It is not done at all now.
Rate of interest that is applied at the beginning of the transaction is on per annum
basis. The drawer gets less than face value and the difference between the bill value
and the discounted value is called discount. For bills discounted in India, the concept
of yield to maturity is not applied. For each successive rediscounting, the rate
progressively decreases and so also the amount of discount.
*** End of note ***
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Workshop on Banking Symbiosis

WHAT IS A BANK AND WHAT IS BANKING?

♦ Acceptance of deposits of various kinds – deposits that can be withdrawn on demand

DIFFERENCE BETWEEN RETAIL BANKING AND WHOLESALE BANKING

WHAT IS A SCHEDULED BANK IN INDIA?

WHAT IS THE DIFFERENCE BETWEEN A COMMERCIAL BANK AND A CO-OPERATIVE

DIFFERENT BANK ACCOUNTS - DEPOSITS

2. Deposit account without withdrawal facility – different categories –

DIFFERENT BANK ACCOUNTS – ADVANCES AND LOANS

1. Overdraft – An extension of current account in which the customer is allowed to

BANKING TERMS OFTEN USED/ COMMON BANKING PRACTICES

5. Bank guarantee – Could be a finance guarantee or a performance guarantee. Under

Example of Performance guarantee

7. Cash Reserve Ratio – Called in short, CRR. It is in operation in India. Usually, in

9. Credit to a customer’s account – Whenever any amount is received by the bank on

Step No. 1 – 10000 x 45 days = known as product = 450,000

Step No. 3 – calculation of interest at 6% p.a. = 1233 x 0.06 = $ 73.98

Amount of deposit - $ 10000

♦ Whether there is any penalty involved for premature withdrawal?

Thus we see whenever export payment is received NOSTRO Account is credited

23. Credit Report – It is called by different names. At times, it is referred to as “Credit

27. Charges in a letter of credit –

28. Charges in a bill

29. Charges in a loan account

For example, in the above case, 1 US $ = F.F. 7.818

Example Spot rate for US$ in terms of French Franc, 1 US $ = FF 7.818/7.808

What is the impact on an importer in the USA?

What will be the scenario if the forward rate is 1 US $ = F.F. 7.828/7.818?

Spot rate 1 US = F.F. 7.818/7.808

1 US $ = F.F. 7.821/7.805. The analysis for this quote is as under:

In India, there is restriction on holding foreign currency assets. Companies and

INTERNATIONAL TRADE GLOSSARY – EXCLUDING TERMS ALREADY EXPLAINED

Advance against collection

Air Way Bill (AWB)

Clean Bill of Lading

Deferred Payment Credit

Documents against Acceptance

Documents against payment

Holder for value

Red Clause Letter of Credit

As mentioned in the introduction, international banking revolves around the following:

The above give rise to the following transactions:

♦ International Travellers’ checks

REMITTANCE OF FUNDS FROM ONE PLACE TO ANOTHER PLACE BESIDES

♦ Routine transfer from persons employed abroad

SYNDICATION OF LOANS GLOBALLY FOR CORPORATE HOUSES

ACCESSING INTERNATIONAL MARKET FOR EQUITY/BORROWING IN THE FORM OF

FOREIGN EXCHANGE MANAGEMENT

Note: A discussion about international banking is not complete without mention of

DIFFERENT LAYERS OF BANKING OPERATIONS IN INDIA IN GENERAL

Most of the large size banks have an international banking department.

TYPICAL DUTIES OF THE CHIEF DEALER OF FOREIGN EXCHANGE IN AN

DAILY ACTIVITIES IN A BRANCH

♦ Prepare office for routine work

♦ Close Previous day’s books of accounts

♦ Working cash to be retrieved from Vault and

♦ Process remittances from other banks

♦ Get the applicable rates for the day –

♦ Initiate the computer system

During the Day

♦ Handle mail from customers and process them

♦ Process customer transactions at the teller counter

♦ Execute standing instructions for customers