Module - A

International Banking

Foreign Exchange
Foreign It includes all deposits, Credit and Balances payable in Foreign currency. It
Exchange also includes Drafts/TCs, LCs and Bills of Exchange payable in Foreign
currency. In means all claims payable abroad.
Forex Market It comprises of individuals and entities including banks across the globe
without geographical boundaries. Forex market is dynamic and it operates
round the clock. Exchange rate of major currencies change after every 4
seconds. It opens from Monday to Friday except in Middle east countries
where it is closed on Friday and opens on Saturday and Sunday.
Exchange Rate When settlement of funds and exchange
mechanism of currency takes place_________
TOD rate or Cash Rate Same day (it is also called ready rate)
TOM Rate Next working day
Spot Rate 2nd working day (48 hours)
Forward Rate After few days/months
If Next day or 2nd day is holiday in either of the two countries, the
settlement will take place on next day. For example Spot deal is
stuck on 23rd Dec. 25th is Christmas Day and 26th is Sunday. Under
such circumstances, value date will be 27th i.e. Monday.
There are two types of rates- Fixed and Floating. Floating rates are
determined by market forces of Demand and Supply. India
switched to Floating exchange rates regime in 1993.

CARD RATES are rates calculated at beginning of day with full margin as
advised by FCTM, Mumbai and are indicative rates up to USD 5000.
Buy and Sell
Maxim Buy Low Sell High
Buy rate is also called Bid Rate and Sell Rate is called Offer Rate.

Forward Rates It is required when currency is exchanged after few months/days.

Buy Transactions :
Spot Rate (+ ) premium OR ( - ) Discount
( Lower premium is added OR Higher discount is deducted )
Sale Transactions:
Spot Rate (+ )Higher premium OR (-) Lower discount

(So that currency may become cheaper while buying and dearer while
selling)

In India, Forward Contracts are available for Maximum period

of 12 Months.
Examples of Euro 1 = USD$1.3180/3190
Forward rates Forward differentials:
1M = 15/18, 2M= 30/37, 3M=41/49

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 Calculate 2M Bid rate and 3M Offer rate

2M Bid rate = 1.3180+.0030 = 1.3210

3M Offer rate = 1.3190+.0049=1.3239
Exchange
Margin Exchange margin is deducted while buying and added while selling.

Direct, Indirect Direct Rates

and Cross Rates Foreign Currency is fixed ---say 1USD = INR 55.70
Indirect Rates
Local currency remains fixed---say Rs. 100 = 1.93 USD

At present, following 4 currencies are quoted in Indirect mode:

EURO, GBP, AUD and NZ$

Cross Rates
Cross rate is price of currency pair which is not directly quoted. It is arrived
at from price of two other currency equations.

1. Suppose bank has to Quote GBP against INR, but in India, GBP is
not quoted directly. In India,
1USD =48.10 and GBP/USD is quoted as 1GBP= USD1.6000.
Therefore 1 GBP = 48.10X1.6 = 76.96

2. An Import bill of GBP 100000 has to be retired. Rates are:

1 GBP=1.5975/85 USD
1USD = 48.14/15 INR
TT margin =.20%
Here Cross selling rate of both currencies will apply. (Only Domestic
market)
1GBP=1.5985*48.15 = 76.9675 + Margin@.20% = 77.1214 (say
77.1225)

All currencies are quoted as per unit of currency whereas the following
currencies are quoted as 100 units of Foreign currency:
1. Japanese Yen
2. Indonesian Rupiahs
3. Kenyan Schilling.
4. Belgian Francs
5. Spanish Peseta

Intervening Currencies in India

1. US Dollar
2. British Pond

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Cross Rates Suppose, In India, 1USD=42.8450/545 and in UK, 1USD=.7587/.7590
where two EURO. The customer intends to remit Euro and he desires to know 1 Euro
markets are = ? INR. We will buy Euro against sale of USD. (One is domestic market
involved and and other is International market)
one of them is Calculation
international Sell rate of 1USD = .42.8545 and Buy Rate of Euro is 1USD=.7587
market .7587Euro = 1USD = INR 42.8545
1 EURO = 42.8545/.7587 = 56.48
In India, there is Full Convertibility of Current Account transactions.
Example Where one currency is bought and another currency is sold
A wants to remit JPY 100.00 million at TT spot with margin @.15%. Given
USD/INR at 48.2500/2600 and in Japan USD/JPY = 90.50/60

Solution:
We will buy Japanese Yen and sell USD and the rate to be applied is:
48.2600/90.50 = .533260 per JPY
Rate per 100 JPY = 53.3260 + Margin @.15%(.0799) = 53.4059 (say
53.4050)

TT Rates and Bill Rates

Following 4 types of buying and selling rates are important:

1. TT Buying rate
2. Bill Buying rate
3. TT Selling rate
4. Bill Selling rate

In Interbank market, exchange rate is quoted up to 4 decimals in multiples of 0.0025. e.g.

1USD=53.5625/5650

For customers the exchange rate is quoted in two decimal places i.e. Rupees and paisa. e.g. 1
USD =Rs. 55.54.

Amount being paid or received will be rounded off to nearest Rupee.

TT Buying Rate
It is required to calculate when our Nostro account is already credited or
being credited without delay e.g. Receipt of DD, MT, TT or collection of
Foreign bills. This rate is used for cancellation of Forward Sales Contract.
Calculation
Spot Rate Exchange Margin

Bill Buying Rate Bill Buying rate is applied when bank gives INR to the customer before
receipt of Foreign Exchange in the Nostro account i.e. Nostro account is
credited after the purchase transaction. In such cases.
Examples are:

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 Export Bills Purchased/Discounted/Negotiated.
Cheques/DDs purchased by the bank.
Calculation
Spot Rate + Forward Premium (or deduct forward discount) Exchange
margin.
TT Selling Rate Any sale transaction where no delay is involved is quoted at TT selling rate.
It is desired in issue of TT, MT or Draft. It is also desired in crystallization of
Export bills and Cancellation of Forward purchase contract.
Calculation
Spot Rate + Exchange Margin
Bill Selling Rate It is applied where handling of documents is involved e.g. Payment against
Import transactions:
Calculation
Spot Rate + Exchange Margin for TT selling + Exchange margin for Bill
Selling

Examples
Q. 1
Bank received MT of USD 5000 on 15 th Sep. The Nostro account was already credited. What
amount will be paid to the customer: Spot Rate 34.25/30. Oct Forward Differential is 22/24.
Exchange margin is .80%

Solution
TT buying Rate will be applied
34.25 - .274 = 33.976 Ans.

Q. 2
On 15th July, Customer presented a sight bill for USD 100000 for Purchase under LC. How
much amount will be credited to the account of the Exporter. Transit period is 20 days and
Exchange margin is 0.15%. The spot rate is 34.75/85. Forward differentials:
Aug: .60/.57 Sep:1.00/.97 Oct: 1.40/1.37

Solution
Bill Buying rate of August will be applied.
Spot Rate----34.75 Less discount .60 = 34.15
Less Exchange Margin O.15% i.e. .0512 =34.0988 Ans.
( Transit period is rounded to next month since currency will be cheaper as it is buy transaction)

Q. 3
Issue of DD on New York for USD 25000. The spot Rate is IUSD = 34.3575/3825 IM forward
rate is 34.7825/8250
Exchange margin: 0.15%
Solution:
TT Selling Rate will Apply

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Spot Rate = 34.3825 Add Exchange margin (.15%) i.e. 0.0516
TT Selling Rate = Spot Rate + Exchange Margin = 34.4341 Ans.

Q. 4
On 12th Feb, received Import Bill of USD-10000. The bill has to retired to debit the account of
the customer. Inter-bank spot rate =34.6500/7200. The spot rate for March is 5000/4500. The
exchange margin for TT selling is .15% and Exchange margin for Bill selling is .20%. Quote rate
to be applied.
Solution
Bill Selling Rate will be applied.
Spot Rate + Exchange margin for TT Selling + Exchange margin for Bill selling =
34.7200+.0520+.0695 = 34.8415 Ans.

Forward Contract Due date and Transit period

(Bill Buying Rates and Bill Selling Rates)
If due date after adding transit period and forward period falls in a particular month

Buy Transactions
Quote rates applicable to lower month (if currency is at premium) and same month (if currency
is at discount) due to the reason that currency becomes cheaper and Buy low and Sell High

Sale Transactions
Quote rates applicable to Same month (if currency is at premium) and lower month (if currency
is at discount) due to the reason that currency becomes dearer and Buy low and Sell High
Forward contracts can be booked by Resident Individuals up to USD1lac.

Buy Spot Rate on 16.07.2012 is 1 USD = 34.6850/7275

Transactions- Spot August = 4000/4200, Spot Sep = 7500/7700, Spot Oct = 1.05/1.07
Currency at Spot Nov =1.40/1.42
Premium Transit Period = 25 days , Exchange Margin = 0.15%

Transit Period is Calculate Forward Buying Rate of 3 M Usance bill.

rounded off to
lower month in Due date of realization of Bill = 16.7.2012 + 3M + 25 days = 9.11.2012
which due date By Rounding Transit period to lower month, Oct Rate will be as under:
falls 34.6850+1.05 - .0536 (exchange margin) = 35.6814

Buy On 22.7.2013,
Transactions- Spot Rate is 35.6000/6500 Forward 1M=3500/3000 2M=5500/5000
Currency at 3M=8500/8000
Discount Transit Period ----20 days Exchange Margin = 0.15%.
Find Bill Buying Rate & 2 M Forward Buying Rate
Transit Period is
rounded off to Solution
same month in Bill Buying Rate (Ready) : Bill Date +20 days = 11.8.2013

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which due date Spot Rate = 35.6000 Less Forward Discount 1M (0.3500) Less Exchange
falls Margin 0.15% (0.529)
i.e. 35.6000-.3500-.0529(0.15% of 35.2500) = 35.1971

2 M Forward Buying Rate: = Transaction date +2M +20 days =11.10.13

3 Month Forward Buying Rate will be applied.
Spot Rate = 35.6000 Less Forward Discount of 3M (.8500) Less Exchange
Margin (.0521)
i.e. 35.6000-.8500-.0521(0.15% of 34.7500) = 34.6979 Ans.

Cancellation of
Deal Cancellation of Buy contract is done at TT selling rate and cancellation of
Sale contract is done at TT buying rate.

Example
A bank purchased export bill of USD 50000 at Rs. 42.66, which was dishonored for non-
payment. How much amount will be recovered from exporter, if Spot rate is 42.2000/3000.
Exchange margin is 0.15%.
Solution
TT selling rate will be applied to recover the amount
TT Selling rate= Spot rate +Exchange margin
=42.3000+0.06345 = 42.36345= 42.3625 (Rounding off to nearest .0025)
Amount to be debited to customers account =50000*42.3625 =2118125 --------------Ans.

Value Date It is date on which payment of funds or entry to an account becomes

effective. Under TT transaction, value date is same. In other spot and
forward contracts, Value Date is the date when Nostro Account is actually
credited.

Arbitrage It consists of purchase of one currency in one center accompanied by

immediate resale against same currency at other center.

Per Cent and Per 1% is on part of 100 whereas per mille is 1 part of thousand
Mille
Authorized
Dealers Authorized dealers are called Authorized Persons. The categories are as
under:
AP category 1 -----AD banks, FIs dealing in Forex transactions.
AP category 2-----Money changers authorized to sell and purchase
Foreign currency notes, TCs and Handle remittances.
AP category 3----Only purchase of Foreign currency and Travelers
Cheques. These were earlier called Restricted Money Changers.

Forward Point Spot Rate

Calculation Euro 1 = US$1.3180

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 3 Month Forward Rate
Euro 1 = US$1.3330
Forward Point = 1.3330 1.3180 = 150 points

Arbitrage & It consists of purchase of one currency in one center accompanied by

Forward Point immediate resale against same currency at other center.
Calculation Example:
Let us borrow from one center and lend at other center at higher rate. In
USA, rate of interest is 6% whereas in Germany, rate of interest is 3% for
EURO. We will borrow from Germany and lend in USA where
1EURO =1.5 USD

Forward Point Calculation for 3 Months

Spot Rate x Interest rate difference x Forward Period

100 x Nos. of days in a year

= 1.5 x 3 x 90
100*360
=0.01125

3 month swap rate = 1.5 + 0.01125 = 1.5112

Calculation of Interest Differential

Forward Points x Nos. of Days x 100

Forward Period x Spot Rate

= 0.01125 x 360 x 100 =3% 1.5 x 90

Some additional examples

Ex.1
Calculate TT selling rate for GBP/INR, if USD/INR is 43.85/87 & GBP/USD is 1.9345/49. A
margin of 0.15% is to be loaded.
Solution ; TT selling rate of GBP/INR
1 GBP = 1.9349 USD
= (1.9349 *43.87)+Margin 0.15%
=84.8841+.1273=85.0114 INR 85.0114-------------------------Ans.

Ex.2
A foreign correspondent intends to fund his Vostro Account maintained with Mumbai branch of
SBI. What rate will be quoted if 1 USD = 44.23/27 and margin is 0.08%
Solution : TT buying rate will quoted
44.23-.035 = 44.195 ---------------------------------------Ans.

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Ex.3
If Swiss Franc is quoted as USD = CHF 1.2550/54 and in India, USD =INR43.50/52, how much
INR will exporter get for his export bill of CHF 50000.
Solution :
Swiss Franc will be sold for USD in overseas market and USD will be bought in local market i.e.
Sell Rate of CHF and Buy rate of USD.
1 USD = 1.2554 CHF and 1USD=INR 43.50
1CHF=43.50/1.2554 = 34.6503
Amount as paid to exporter = 34.6503*50000=17,32,515/- ----------------Ans.

Ex.4
If Swiss Franc is quoted as USD = CHF 1.2550/54 and USD =INR43.50/52, how much INR will
Importer pay for his import bill of CHF 50000.
Solution :
Swiss Franc will be bought against USD in overseas market and USD will be sold in local
market i.e. Buy rate of CHF and Sell rate of USD.
1 USD = 1.2550 CHF and 1USD=INR 43.52
1CHF=43.52/1.2550 = 34.6773
Amount to be received from Importer = 34.6773*50000
=17,33,865/- ----Ans.

Q. 5
Exporter received Advance remittance by way of TT French Franc 100000.
The spot rates are in India IUSD = 35.85/35.92 1M forward =.50/.60
The spot rates in Singapore are 1USD = 6.0220/6.0340 1M forward =.0040/.0045
Exchange margin = 0.8%

Solution
Cross Rate will apply
USD will be bought in the local market at TT Buying rate and sold at Spot Selling Rates in
Singapore for French Francs:
TT Buying Rates USD/INR = Spot rate Exchange margin = 35.8500-.0287 = 35.8213
Spot Selling Rate for USD/Francs = 6.0340

Inference:
6.0340 Franc = 1USD
= INR 35.8213
1 franc = 35.8213/6.0340 = INR 5.9366 Ans.

Q.6 What rate will be quoted for repatriation of FCNR deposit (spot rate or TT rate)
Ans. No rate as the amount is to be paid in Foreign currency itself.
Forex Dealing It is a service branch which deals Buying and Selling Operations of the

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Room bank. It manages Foreign currency Assets and Liabilities and also
operations manages Nostro accounts.

A dealer has to maintain two positions:

1. Funds position
2. Currency Position
Currency position can be Overbought or Oversold. It is called Open
position. Hedging is done to square off the open position.

Mid Office deals with Risk Management.

Back Office takes care of settlement and Reconciliation.

FOREX RISKS AND DERIVATIVES

Foreign Exchange Risk (Transaction Exposure, Translation Exposure and

Exchange Risks Operational Exposure)
Settlement Risk
Liquidity Risk
Country Risk or Sovereign Risk
Interest Rate Risk or Gap risk
Operational Risk
Legal Risk
Buyer Risk, Seller Risk and Shipping Risk.
ICG (Internal Overnight Limit Maximum exposure a bank can keep overnight
control Day Light Limit : Maximum exposure a bank can expose at any time during
guidelines of a day.
RBI Gap Limit: Maximum inter-period say a month exposure which a bank can
keep.
Counter party limit
Country limit
Dealer limit
Stop Loss limit
Settlement limit
Deal Size limit

Net Overnight Open Position (NOOPL) for calculation of capital

charge on foreign exchange risk may be fixed by Board. Such limit
should not exceed 25% of total capital.
Aggregate Gap limit (AGL) should not exceed 6% of total capital.
CCIL Clearing Corporation of India Limited is the institution created for clearing
and settlement of Forex deals amongst Primary dealers. It mitigates
settlement Risks.. Both counter parties should be members of CCIL. It
handles USD/INR deal settlements with netted amounts.
Derivatives Instruments which reduce risk to an accepted level by future coverings are

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 called derivatives. Popular derivatives are:
1. Forward Contracts
2. Futures
3. Options
4. Swaps
Forward It is a derivative product in which seller agrees to deliver goods on some
Contract future date at fix price. The Quantity and delivery date is fixed as per
requirements suited to the party. These are OTC products.

Forward differentials are calculated on the basis of difference in interest

rates of countries of currency.

Currency with lower interest would be at a premium and currency with

higher interest will be at a discount in future.
Futures It is a derivative product that is based on agreement to buy or sell an asset
at certain price in Future.

Futures are standardized contracts with regard to quantity and Delivery

date only. The delivery is not must. Margin is kept each day and it is
adjusted. These Futures are traded in Exchanges,

Difference between Futures and Forward Contracts

Forward Contract Futures
It is OTC (Over the Counter) Product It is Exchange traded product
It can be for any odd amount It is always for Standard amount
It can be for any Odd period It is always for Standard period
Delivery is essential Delivery is not must
Margin is not essential It is based on Margin requirement and
Marked to market
Options Option is Right to buy or sell an agreed quantity of currency or commodity
without obligation to do so. The buyer will exercise the option if market
price is in favor or otherwise option may be allowed to lapse.

Call Option
Right to buy at fixed price on or before fixed date.
Put Option
Right to sell at fixed price on or before fixed date.
Final day on which it expires is called maturity.
CALL OPTION;
If Strike price is below the spot price, the option is In the money.
If Strike price is equal to the spot price, the option is At the money.
If Strike price is above the spot price, the option is Out of money.
PUT OPTION
If Strike price is more the spot price, the option is In the money.
If Strike price is equal to the spot price, the option is At the money.

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 If Strike price is less than spot price, the option is Out of the money.
American Option
Option can be exercised on any day before expiry.
European Option
Option can be exercised on maturity only.
Swap Foreign Exchange transactions where one currency is sold and purchased
Transactions - for another simultaneously.
Swap Deal may involve:
1. Simultaneous purchase of spot and sale of forward or vice versa.
2. Simultaneous sale and purchase, both forward but for different
maturities. It is called Forward to Forward Swap.
Conditions of Swap Deal:
There should be simultaneous buying and selling of same foreign
currency of same value for different maturities.
The deal should be concluded with the understanding between the
banks that it is Swap Deal.
Buying and Selling is done at same rate. Only Forward margin
enters into the deal as a Swap difference.
Example:
PNB approaches UCO bank to quote its Swap rate for spot to 3months.
UCO bank has to sell spot and buy forward. Swap deal is at forward
differential of Rs. 1.40/1.35. UCO bank will sell spot and buy forward at a
discount of Rs.1.40 (Higher discount at purchase). Swap Difference will be
at Discount of Rs.1.40.

CORRESPONDENT BANKING

Correspondent It is a relationship between two banks which have mutual accounts with
Banking each other:
Nostro accounts Our account with you
E.g. SBI Mumbai maintaining USD account with City Bank, New York
Vostro accounts Your account with us
E.g.. City Bank New York maintains Rupee account with SBI Ludhiana.
Loro account His account with them
E.g. City bank referring to Rupee account of Bank of America with SBI
Mumbai.
Mirror account ---- It is replica of Nostro account to reconcile.

What is Swift?
Society for Worldwide Interbank Financial Telecommunications. There are
8300 members of the society. Financial messages are sent through Swift.
The messages are automatically authenticated through BKE (Bilateral Key
Exchange). It is operational 24 hours and 365 days. Swift has now
introduced new system of authentication system wherein banks are

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 required to have authentication key exchanged between them through a set
format by use of RMA (Relationship Management Application). This is
called BIC or Bank Identifier Code).
CHIPS New York
Clearing House Inter Bank Payment System.
CHIPS is major payment system in USA with 48 members. The participants
use the system throughout the day for sending and receiving electronic
payment instructions. These are netted at end of the day and net position is
debited or credited to Nostro account of Federal Reserve.
It is used for Foreign Exchange Inter bank settlements and Euro Dollar
Settlements.
FEDWIRE -USA
It is US payment system being operated by Federal Reserve Bank. It
handles majority of domestic payments. All US banks maintain account with
Federal Reserve Bank and are allotted ABA numbers to identify senders
and receivers of payments.
CHAPS London
Clearing House Automated Payment System
It is UK based Settlement System. It handles receipts and Payments in UK.
It has 16 member banks and 400 Indirect members.
TARGET
The full form of TARGET is Trans-European Automated Real-Time Gross
Settlement Express Transfer System. It is Euro Payment System which
comprises of 15 national RTGS systems working in EUROPE. It process
high value payments from 30000 participating institutions across Europe.
RTGS-plus
RTGS plus has over 60 participants. It is a German Hybrid clearing system
and operating as a European oriented RTGS and Payment system.

RTGS & NEFT in India

Real Time Gross Settlement is a payment system for Interbank transfer
with minimum Rs. 2.00 lac. This system is managed by IDRBT, Hyderabad,
which connects all banks to Central server maintained by RBI. The network
is INFINET (Indian Financial Network)
Timings are:
R-41 transactions 9:00AM to 4:30PM (Saturday: 9:00 to 1:30 PM)
R-42 transactions 9:00 AM to 6:00 PM

NEFT (National Electronic Fund Transfer) is mainly used for low amount
transactions. However, there is no minimum and maximum limit. The
timings are: 8:00AM to 7:00PM (Saturday 8:00 to 1:00 PM). There are 12
batches daily except Saturday with 6 batches. The time period is B+2.
Who is Resident A person who resides in India for more than 182 days during preceding
Indian? Who is financial year is Resident Indian. A person who is not resident is Non-

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Non- Resident Resident.
Who is NRI? A person who is citizen of India but resides outside India owing to:
Employment, Business, vocation-------indicating indefinite period of
stay outside.
Work abroad on assignment with Foreign Govt., UNO, and IMF etc.
Deputation officially.
Study abroad.
PIO - Persons of PIO is a person who is citizen of any other country, but he at any time:
Indian Origin Held Indian Passport
He or his grand-parents or grand grand parents were Indian citizens
by virtue of constitution of India or under Indian Citizenship Act.
The person is spouse of Indian Citizen.
OCB Overseas OCBs are firms, Cos, Society owned directly or indirectly to the extent of at-
Corporate least 60% by NRIs.
Bodies It also includes overseas trusts where at-least 60% irrevocable beneficial
interest is held by non-residents directly or indirectly.
NRE Deposit Only non-resident Indians can open following NRE accounts with banks:
Accounts Fixed Deposits & Recurring Deposits
SB and CA Deposits

The other features are:

Deposits are held in Indian currency.
The Principal and Interest both can be repatriated.
Account holder bears the risk of fluctuations in currency rates.
Account will be opened with proceeds from abroad.
Funds originating in India cannot be deposited.
Interest rates Have since been deregulated by RBI..
No lien is permitted to be marked against SB deposits.
Joint account with Indians can be opened as Former or
Survivor.
Cheque book and IBS allowed.
Nomination in favor of NRI/Resident Indian allowed.
Interest Income is exempt from Income Tax, Gift Tax or Wealth Tax.
TOD allowed up to Rs. 50000/- for maximum 2 weeks.
Account can be operated in India through mandate also.
Loans against FDR to 3rd parties allowed provided NRI is personally
present for documentation.
FCNR- B FCNRB accounts can also be opened by NRIs. The conditions of NRE
accounts deposits as explained above are also applicable on FCNR-B deposits with
the following additional features:
Only FD 1-5 years tenure can be opened.
The amount is kept in Foreign Currency and repaid in the Foreign
Currency.
6 currencies i.e. GBP, USD, Euro, JPY, CAD. AUD are eligible

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 currencies for opening the account.
No exchange risk for the customer. The bank bears the risk.
Interest on the basis of 360 days in a year
Half yearly intervals of 180 days
Interest exemptions from I.T.
Operating by P/A not permitted.
The amount of Principle and Interest is freely repatriable
Interest Rate on 1-3 years FD is LIBOR + 200 bps and that of 3-5
years FD is LIBOR + 400 bps.(Previously, it was LIBOR + 300 bps)
Rupee Loans Demand Loan or Overdraft is allowed against FDR. There is no maximum
against limit of loan against pledge of FDR (Which was 100 lac earlier). The loan
NRE/FCNRB can be availed for :
FDRs Personal purpose.
Investment.
Purchase of property.

The loan can be repaid :

From proceeds of abroad
From NRE/FCNR account
From local resources through NRO account.
NRO accounts Non-Resident accounts can be opened:
By any person resident outside India (other than a person resident
in Nepal and Bhutan) can open NRO account, maintain it for 6M
and can convert it into foreign currency after completion of stay
provided no local funds are credited to the account.
Deposit may be held jointly with residents
Currency of Deposit is Indian Rupees
Not Repatriable except for the following in the account - 1) Current
income 2) Up-to USD 1 Million per financial year.
Type of Deposit may be Savings, Current, Recurring, Fixed Deposit.
Existing accounts of residents are converted to NRO category
consequent upon their becoming NRIs.
TDS called withholding Tax is applicable at 30% + Service Tax
+Education Cess.
Prior permission of RBI is required to open NRO account of
Pakistani national. However permission is not required for
opening NRO account of Bangladeshi citizen.
Resident It has been decided that AD banks may include an NRI close relative
Accounts (relatives as defined in Section 6 of the Companies Act, 1956) in existing /
Operation Either new resident bank accounts as joint holder with the resident account holder
or Survivor with on Either or Survivor basis subject to the following conditions:
non- resident
Such account will be treated as resident bank account
Cheques, instruments, remittances, cash, card belonging to the NRI

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 close relative shall not be eligible for credit to this account
The NRI close relative shall operate such account only for and on
behalf of the resident for domestic payment
Where due to any eventuality, the non-resident account holder becomes
the survivor, it shall be categorized as NRO account
Investments by NRIs are allowed to invest in India on Repatriation basis as well as on Non-
NRIs in India Repatriation basis. NRI can purchase Equity Shares, Preference shares
and Convertible Debentures in Indian companies subject to conditions
under following categories:
1. Foreign Direct Investments.
2. Portfolio Investment
3. Purchase and Sale of Shares on Non-Repatriation basis.
4. Purchase of other securities of Indian Companies.
5. Exchange Traded Derivatives.
Besides above, NRIs are permitted to invest in:
Units of UTI and Mutual Funds
Company Deposits Minimum 3 years period.
Share in Proprietorship firm/partnership firm provided the firm is not
engaged in Agriculture and Plantation activity or Property business.
Acquiring of Immovable property not being Agriculture, Plantation or
Farm House.
NRI can acquire IP by way of :
Purchase out of funds received in India
By way of gift from resident in India or outside India.
By way of Inheritance from a person resident outside India.
The Income from the property or sale proceeds of the property can be
repatriated outside India up to monetary limit of USD1 Million per financial
year provided all the applicable taxes are paid.
NRIs can invest in Govt. securities, treasury bills on non- repatriation
basis. However, NRI cannot invest in Small saving Schemes including
PPF.
Loans to NRIs NRI can avail the following loans:
1. Rupee Loans in India
- Up to up to any limit subject to prescribed margin.
- For personal purpose, contribution to Capital in Indian
Companies or for acquisition of property.
- Repayment of loan will be either from inward remittances or
from local resources through NRO accounts.
2. Foreign Currency Loans in India
- Against security of funds in FCNR-B deposits.
- Maturity of loan should not exceed due date of deposits.
- Repayment from Fresh remittances or from maturity proceeds of
deposits.
3. Loans to 3rd Parties provided
- There is no direct or indirect consideration for NRE depositor
agreeing to pledge his FD.

16
 - Margin, rate of Interest and Purpose of loan shall be as per RBI
guidelines.
- The loan will be utilized for personal purpose or business
purpose and not for re-lending or carrying out
Agriculture/Plantation/Real estate activities.
- Loan documents will be executed personally by the depositor
and Power of attorney is not allowed.
4. Housing Loans to NRIs : HL can be sanctioned to NRIs subject to
following conditions:
- Quantum of loan, Margin and period of Repayment shall be
same as applicable to Indian resident.
- The loan shall not be credited to NRE/FCNR account of the
customer.
- EM of IP is must and lien on assets.
- Repayment from remittance abroad or by debit to NRE/FCNR
account or from rental income derived from property.

Portfolio RBI has permitted NRIs to invest in PIS subject to following conditions:
Investment Investment on repatriation as well as non-repatriation basis.
Scheme for NRIs Purchase/Sale of shares and debentures
Through Regd. Brokers
Amount is routed through designated branch.
Only delivery based transactions
Investment on Repatriation basis can be made out of inward
remittances or out of NRE/FCNR deposits.
Investment on Non-Repatriation basis can be made out of NRO
deposits besides NRE/FCNR deposits.

Ceiling PER Investor

5% of paid up capital of Indian Company or 5% of Value of each issue of
convertible debentures.
Ceiling PER Investor Company
10% of paid up capital of Indian Company or 10% of Value of each issue of
convertible debentures.

LETTER OF CREDIT

Documentary LC is a document:
Letters of Credit Issued by Buyers bank at his request.
(LC) Carrying undertaking to pay to the seller
Upon presentation of documents evidencing shipping of goods.
In compliance with terms and conditions.
ILC is Inland Letter of Credit and FLC is Foreign Letter of Credit. The
parties to LC are as under:

17
 Applicant Buyer or Importer
Beneficiary Seller or Exporter
Issuing Bank It is opening Bank which ultimately pays on
behalf of importer in the Importers country.
Advising Bank or Bank in Exporter Country through which LC is
Notifying Bank advised. It acts as agent without responsibility to
pay unless it confirms.
Negotiating Bank Bank in Exporter Country which makes payment
or Nominated Bank to exporter or accepts Bill of Exchange.
Confirming Bank In Exporters country. It may be advising bank
also if it adds confirmation. This bank will be
responsible for default, if any.
Reimbursing Bank The bank which reimburses the negotiating
bank. (Usually, it is the bank having Nostro
account of Opening Bank.
UCPDC 600 It is a publication of ICC (international Chamber of Commerce). It does not
Uniform Custom apply by default. There must be special mention in LC about applicability of
and Practice of UCPDC 600. It has 39 articles. Some of the important are here under:
Documentary Issuing Bank gets Reasonable time for acceptance/refusal of
Credit Documents which is 5 Banking days after presentation.
Bank to deal with documents and not with goods. Bank not to check
quality of the goods. However shipping documents must contain the
particulars of commodity shipped which should match with LC.
Bank is not concerned with underlying contract of buyer and seller.
Courts refrain from passing injunction on complaint of importer
regarding any discrepancy of goods.
Amount of Bill may differ from LC amount 10% (Tolerance limit)
Quantity of Bill may differ from LC specification 5% (Tolerance
limit).
Documents are original if it carries original signatures, stamp mark
and label of issuer.
Documents must be presented for negotiation within 21 Calendar
days from date of Shipment. It becomes stale thereafter.
If expiry of LC falls on Public holiday, under such situations
documents can be submitted on Preceding banking day.
Types of LC LC Type Features
Revocable It is an LC which can be amended or cancelled
without consent of all parties. UCPDC 600 does not
allow issue of such LC.
Irrevocable It is LC which cannot be cancelled or amended
without consent of all parties.
Confirmed LC If confirmed by some bank in exporter country.
Transferable LC It can be transferred in Full or part by advising bank at
the request of issuing bank. ONLY ONCE
Red Clause LC It enables the beneficiary to avail pre-shipment credit

18
 .
Green Clause Besides pre-shipment, advising bank can allow
Letter of Credit advance for storage and shipment.
Revolving LC Where bills are negotiated and LC is automatically
renewed.
Back to Back LC Beneficiary Uses LC to open another LC in favor of
local suppliers.
Standby LC It is issued in lieu of Guarantee. It is substitute of
guarantee and is used in countries like US where
guarantees are not used.
If nothing is mentioned, LC will be Irrevocable, non-transferable.
Documents under LC
1. Bill of exchange.
2. Invoice
3. Transport Documents: Bill of Lading & Airway Bill
4. Insurance Documents (Insurance is done at 110% of CIF value)
5. Certificate of Origin
Short Bill of Lading: Which does not carry detailed terms and conditions
Thorough Bill of Lading covers entire voyage with several modes of
transport
Straight Bill of Lading is issued directly in the name of consignee.
Clause Bill of Lading: It bears super imposed clause that declared
defective condition of Goods.
Clean Bill of Lading: It has no such super imposed clause declaring
goods or packaging as defective.
Crystallization of It is incumbent upon the issuing bank to make payment immediately.
Foreign In case of sight documents, the issuing bank can hold documents for
currency maximum period of 10 days. In case the bill is not retired or paid within this
Liability period, the issuing bank will crystallize the liability on 10th day at Bill
Selling rate or the rate at which the contract was booked (whichever is
higher)
In case of Usance bill, Forex liability will be crystallized on due date into
Indian Rupees at Bill Selling rate or Contracted Rate (which is higher)
Inco Terms Ex-Works
Exporter says that goods can be picked up from Factory. Exporter will not
pay the freight. The transport cost and risk will be borne by the Importer.
FCA (Main Freight Paid by Buyer)
Free Carrier means seller hands over the goods to first Carrier.
FAS (Main Freight Paid by Buyer)
Free alongside ship i.e. Goods will be delivered by exporter to shipping co.
FOB (Main Freight Paid by Buyer)
Free on Board (Say FOB Mangalore) means Goods will be loaded on
ship/Aero plane (main carriage still unpaid by the exporter)
CFR (Cost and Freight Paid by Seller)
Seller will pay cost and freight till destination

19
 CIF (Cost, Insurance and Freight paid by Seller)
The cost, Insurance and Freight will be borne by seller.
Other related
guidelines UCPDC does not apply by default. It is required to be mentioned on
LC

Shipping Documents can be dated prior to the date of LC. It means

LC covers the shipping done prior to the issue of letter of credit. But,
the shipping done after expiry of LC is not permitted.

On or about date means 5 Calendar days. If it is mentioned on LC

that date of credit is on or about 31.12.2013. This implies that date
of expiry of LC can be after 5 calendar days after 31.12.2013.

EXPORTS

RBI and DGFT RBI controls Foreign Exchange and DGFT (Directorate General of Foreign
Trade) controls Foreign Trade. Exim Policy as framed in accordance with
FEMA is implemented by DGFT. DGFT functions under direct control of
Ministry of Commerce and Industry. It regulates Imports and Exports
through EXIM Policy.
On the other hand, RBI keeps Forex Reserves, Finances Export trade and
Regulates exchange control. Receipts and Payments of Forex are also
handled by RBI.
IEC - Importer One has to apply for IEC to become eligible for Imports and Exports. DGFT
Exporter Code allots IEC to Exporters and Importers in accordance with RBI guidelines
and FEMA regulations. EXIM Policy is also considered before allotting IEC.
Export All exports (physically or otherwise) shall be declared in the following Form.
Declaration 1. GR form--- meant for exports made otherwise than by post.
Form 2. PP Form---meant for exports by post parcel.
3. Softex form---meant for export of software.
4. SDF (Statutory Declaration Form)----replaced GR form in order to
submit declaration electronically.
SDF is submitted in duplicate with Custom Commissioned who puts its
stamp and hands over the same to exporter marked Exchange Control
Copy for submission thereof to AD.

Exemptions
Up to USD 25000 (value) Goods or services as declared by the
exporter.
Trade Samples, Personal effects and Central Govt. goods.
Gift items having value up to Rs. 5.00 lac.
Goods with value not exceeding USD 1000 value to Myanmar.

20
 Goods imported free of cost for re-export.
Goods sent for testing.
ADs may consider waiver for export of goods free of cost for export
promotion up to 2% of average annual exports of previous 3 years subject
to ceiling of Rs. 5.00 lac. The limit is Rs. 10.00 lac for Status Holder
Exporters.
Prescribed Time The time norms for export trade are as under:
limits Submission of documents with Exchange Control Copy to AD
within 21 days from date of shipment.
Time period for realization of Export proceeds is 12 M or 365 days
from date of shipment. (Reduced to 9M )
For SEZ (Special economic zones), SHE (Status Holder Exporters)
and 100%EOUs, time period has been restricted to 12Months.
For, Exports to Warehouse established outside India, as soon as it
is realized and in any case within fifteen months from the date of
shipment of goods
After expiry of time limit, extension is sought by Exporter on ETX
Form. The AD can extend the period by 6M.
However, reporting will be made to RBI on XOS Form on half yearly
basis in respect of all overdue bills which remained outstanding for
more than 180 days (6M).

Direct Dispatch AD banks may handle direct dispatch of shipping documents provided
of Shipping export proceeds are up to USD 1 Million and the exporter is regular
Documents customer of at least 6 months.

Advance Exporters may receive advance payments from their overseas importers
Payments provided:
Shipment is made within 1 year from receipt of advance.
Rate of interest payable should not exceed LIBOR+100 bps.
Documents are routed through AD from which advance was routed.
Prescribed Exporter will receive payment though any of the following mode:
Method of Bank Drafts, TC, Currency, FCNR/NRE deposits, International
payment and Credit Card. But the proceeds can be in Indian Rupees from Nepal
Reduction in and Bhutan.
export proceeds Export proceeds from ACU countries can be settled in ACU/EURO
or ACU/Dollar. A separate Dollar/Euro account is maintained which
is denominated as ACU Dollar or ACU EURO.

ACU Asian Clearing Union was formed in Tehran, Iran in 1974 and it
comprises of following 9 countries as members.

India, Bangladesh, Burma, Myanmar, Iran, Pak, Srilanka, Nepal and

Maldives.

21
 Exporters may be allowed to reduce the export proceeds with the following:
Reduction in Invoice value on account of discount for pre-payment
of Usance bills (maximum 25%)
Agency commission on exports.
Claims against exports.
Write off the unrecoverable export dues up to maximum limit of 10%
of export value.
The proceeds of exports can be got deposited by exporter in any of the
following account:
1. Overseas Foreign Currency account.
2. Diamond Dollar account.
3. EEFC (Exchange Earners Foreign Currency account)
DDA _ diamond Diamond Dollar account can be opened by traders dealing in Rough and
Dollar accounts Polished diamond or Diamond studded Jewellary with the following
conditions:
1. With track record of 2 years.
2. Average Export turnover of 3 crores or above during preceding 3
licensing years.
DDA account can be opened by the exporter for transacting business in
Foreign Exchange. An exporter can have maximum 5 Diamond Dollar
accounts.
EEFC Exchange Earners Foreign Currency accounts can be opened by
exporters. 100% export proceeds can be credited in the account which
does not earn interest but this amount is repatriable outside India for
imports (Current Account transactions).
Pre-shipment Packing credit has the following features:
Finance or
Packing Credit 1. Calculation of FOB value of order/LC amount or Domestic cost of
production (whichever is lower).
2. IEC allotted by DGFT.
3. Exporter should not be on the Caution List of RBI.
4. He should not be under Specific Approval list of ECGC.
5. There must be valid Export order or LC.
6. Account should be KYC compliant.

Liquidation of Pre-shipment credit

Out of proceeds of the bill.
Out of negotiation of export documents.
Out of balances held in EEFC account
Out of proceeds of Post Shipment credit.
Concessional rate of interest is allowed on Packing Credit up to 270
days. Previously, the period was 180 days. Running facility can also be
allowed to good customers.
Post Shipment Post shipment finance is made available to exporters on the following

22
Finance conditions:
IEC accompanied by prescribed declaration on GR/PP/Softex/SDF
form must be submitted.
Documents must be submitted by exporter within 21 days of
shipment.
Payment must be made in approved manner within 6 months.
Normal Transit Period is 25 days.
The margin is NIL normally. But in any case, it should not exceed
10% if LC is there otherwise it can be up to 25%.
Types of Post Shipment Finance:
Export Bills Purchased for sights bills and Discounting for Usance
bills.
Export bills negotiation.
Discrepancies of Documents
Late Shipment, LC expired, Late presentation of shipping documents, Bill
of Lading not signed properly, Incomplete Bill of Lading, Clause Bill of
Lading , Short Bill of Lading or Inadequate Insurance.
Advance against Un-drawn Balance
Undrawn balance is the amount less received from Importers. Bank can
finance up to 10% undrawn amount up to maximum period of 90 days.
Advance against Duty Drawback
Duty drawback is the support by Government by way of refund of
Excise/Custom duty in case the domestic cost of the product is higher than
the Price charged from the importer. This is done to boost exports despite
international competition. Bank can make loan to exporter against Duty
Drawback up to maximum period of 90 days.
GATS Credit can be afforded to exporters of all the 161 services covered under
GATS General Agreement on Trade in Services. The provisions
applicable to export of goods apply mutatis mutandis to export of services.
Crystallization of Consequent upon non-realization, Conversion of Foreign Exchange liability
Overdue Bills into Rupees is called crystallization. It is done on 30th day after notional
due date at prevailing TT selling rate or Original Bill Buying Rate
(Whichever is higher).

DA Bills
Notional due date is calculated in DA Bill by adding normal period of transit
i.e. 25 days in the Usance period. 30th day is taken from notional due date.
DP Bills
30th day after Normal Transit Period
If 30th day happens to be holiday or Saturday, liability will be
crystallized on the following working day.
Policy has been liberalized and crystallization period will be decided by
individual banks.

23
Export of Credit can be provided to exporters of all 161 tradable services covered
services under GATS (General Agreement on Trade in services) where payment for
such services is received in Forex. The provisions applicable to export of
goods apply to export of services.

Gold Card All exporters in Small and Medium Sector with good track record are
Scheme eligible to avail Gold Card Scheme. The conditions are :
1. Account should be classified as Standard assets for the last 3
years.
2. Limit is sanctioned for 3 years and thereafter automatic renewal.
3. There is provision of 20% Standby limit.
4. Packing Credit is allowed in Foreign currency.
5. Concessional rate is allowed for 90 days initially which can be
extended for 360 days.
6. Bank may waive collateral and provide exemption from ECGC
Guarantee schemes.
Factoring and Factoring is financing and collection of Receivables. The client sells
Forfaiting Receivables at discount to Factor in order to raise finance for Working
Capital. It may be with or without recourse. Factor finances about 80%
and balance of 20% is paid after collection from the borrower. Bill should
carry LR/RR. Maximum Debt period permitted is 150 days inclusive of
grace period of 60 days. Debts are assigned in favour of Factor. There are
2 factors in International Factoring. One is Export Factor and the other is
Import Factor. Importer pays to Import factor who remits the same to Export
Factor.

Forfaiting is Finance of Export Receivables to exporter by the Forfaitor. It

is also called discounting of Trade Receivables such as drafts drawn under
LC, B/E or PN. It is always No Recourse Basis (i.e. without recourse to
exporter). Forfaitor after sending documents to Exporters Bank makes
100% payment to exporter after deducting applicable discount. Maximum
period of Advance is 180 days.
Pre-shipment & Post-shipment Finance
Q. 1
Received order of USD 50000(CIF) to Australia on 1.1.11 when USD/INR Bill Buying Rate is
43.50. How much pre-shipment finance will be released considering profit margin of 10% and
Insurance and freight cost@ 12%. Contribution from borrower is 25%.

Solution
FOB Value = CIF Insurance and Freight Profit (Calculation at Bill Buying Rate on 1.1.11)
= 50000X43.5 = 2175000 261000(12%) 191400(10% of 1914000) = 1722600
Pre-shipment Finance = FOB value - 25% (Margin) = 1722600-430650=1291950.Ans.

Q. 2
What will be amount of Post-shipment Finance under Foreign Bill Purchased for USD 45000

24
when Bill Buying rate on 31.3.11 (date of submission of Export documents) is 43.85

Solution
45000X43.85 = 1973250 Ans.

Q. 3
Period for which concessional Rate of Interest is charged on DP bills from date of purchase.

Solution
25 days .Ans.

Q. 4 If the above said bill remains overdue for 2 months, what will be date of crystallization?
Due Date of Bill will be 31.3.11 + 25 days = 25.4.2011
The bill will be crystallized on 24.5.2011 i.e. on 30th day from due date. Ans.

Q. 5
On 8th Sep, an exporter tenders a demand bill for USD 100000 drawn on New York. The
USD/INR quote is as under:
Spot---------USD 1 =34.3000/3500
Spot Sep-------------------6000/7000
Spot Oct--------------------8000/9000
Spot Nov------------------10000/11000
Transit Period is 20 days and Exchange margin 0.15%
Calculate Rupee payable to the customer. Customer wants to retain 15% in Dollars
Interest @13% has to be charged on INR liability of the customer.
Solution
Since, the currency is at premium, the transit period will be rounded off to the lower month
(i.e. NIL). And the rate to the customer will be based on Spot Rate. If interest rate is 13%, how
much interest will be recovered from the Exporter

Spot Buying rate = 34.3000

Less Exchange Margin = 0.0515
34.2485 or 34.25 per dollar.

Amount in Indian Rupee = 85000(85% of 100000) x 34.25 = 2911250/-

Interest will be charged on 2911250/- @ 13% for 20 days = 20738/-.

Q. 6
On 26th Aug, an exporter tenders for purchase a bill payable 60 days from sight and drawn on
New York for USD 25650. The dollar rupee rate is as under:
Spot----------------------1USD = 34.6525/6850
Spot Sep--------------------------------1500/1400
Spot Oct---------------------------------2800/2700
Spot Nov--------------------------------4200/4100

25
Spot Dec--------------------------------5600/5500

Exchange Margin is 0.15%, Transit Period is 20 days. Rate of Interest is 13%. An amount of Rs.
500/- on account of Out of Pocket expenses has to be charged.
What will be the exchange rate payable to the customer and Rupee amount payable?
Solution
Notional due Date = 20+60 days from 26th Aug i.e. 14th Nov. Since, the currency is at discount,
the period will be rounded off to the same month). Obviously, the discount of Nov will be more
and it will make the Buy Rate Lower.

Dollar/Rupee market spot Buying Rate = 34.6525

Less Discount for August to November = 0.4200
34.2325
Less Exchange Margin @.15% .0513
= 34.1812

Rupee Amount payable to exporter = 25650 X 34.18 = 876717-00

Less Interest for 80 days @ 13% = 24980-00
Less out of pocket expenses = 500-00
851237-00

IMPORTS

Imports Pre- AD1 banks are to ensure that Imports are in accordance with:
requisites Exim Policy
RBI Guidelines
FEMA Rules
Goods are as per OGL (Open General list).
Importer is having IEC (Import Export Code) issued by DGFT.
Imports The following are essential elements of Imports:
Formalities & 1. An importer before remitting proceeds exceeding USD 5000 must
Time limit for submit application on Form A-1 to the Authorized Dealer.
import payment 2. AD banks can issue LC on the basis of License and Exchange
Control Copy.

Remittance against exports should be completed within 6 months from

date of shipment.
Any delay beyond 6 months will be treated as Deferred
Payment arrangement and the same will be treated as
Trade Credit up to the period less than 3 years.

Advance AD Banks may remit advance payment of Imports subject to following

Remittances conditions:
Up to USD 200000 or equivalent after satisfying about nature of
transaction, trade and standing of Supplier.

26
 In excess of 2,00,000 USD, an irrevocable Standby LC or
Guarantee from a bank of international repute or a guarantee from
bank in India, if such guarantee is issued against Counter
guarantee of International bank outside India.
The requirement of guarantee may not be insisted upon in case of
remittances above USD200000 up to USD 50, 00,000 (5 million)
subject to suitable policy framed by BOD of bank. The AD should be
satisfied with track record of the exporter.
Approval of RBI is required only if Advance remittance exceeds
USD 50,00 000 or equivalent.
Advance remittance will be made direct to overseas supplier or his
bank.
Physical imports must be made within 6 months from date of
Remittance. For Capital goods, the period is 3 years.

Evidence of Importer must submit Evidence of Imports i.e. Exchange control copy of
Imports Bill Of Entry. The AD will ensure receipt of Bill Of Entry in all cases
where Value of Forex exceeds USD 100000, within 3 months from date of
remittance. Otherwise, one months notice will be served. If there is still
default of 21 days after serving notice, AD will forward Statement to RBI on
Half yearly basis on BEF Form.
Import Finance Importer can avail finance from banks/FIs in the shape of :
1. Letter of Credit
2. Import Loans against Pledge/Hypothecation of stocks.
3. Trade Credit Supplier Credit or Buyer Credit
Trade Credit If the Import proceeds are not remitted, within 6 months, it is treated as
Trade Credit up to the period less than 3 years. For period 3 years and
above, the credit is called ECB (External Commercial Borrowings).
Types of Trade Credit: There are two types of Trade Credit:
1. Suppliers Credit
2. Buyers Credit
Suppliers Credit
It is credit extended by Overseas suppliers to Importer normally beyond 6
months up to period of 3 years.
Up to 1 year for Current Account Transactions
Up to Less than 3 years for Capital Account Transactions
Monetary Limit is USD 20 million per transaction.
Buyers Credit
It is credit arranged by Importer from Banks/FIs outside countries. Banks
can approve proposals of Buyers Credit with period of Maturity:
Up to 1 year for Current Account Transactions
Up to Less than 3 years for Capital Account Transactions
Monetary Limit is USD 20 million per transaction.

Crystallization of In case the importer fails to make payment,

27
Foreign Crystallization of Foreign Exchange liability into Indian Rupees is done on
Currency 10th day at Bill selling Rate or Original Bill Selling rate (whichever is
Liability into INR higher)

In case of Retirement of Import Bill

The crystallization is done at current Bill Selling Rate on the following dates
DP Bill: On 10th Day from date of receipt of Import Bill.
DA Bill: On Actual Due Date.

All-in Cost The present Ceilings for all-in-cost, including interest for buyers/suppliers
Ceiling credit, as fixed by RBI is as under:
1. Up to 365 days --------------------- 6M LIBOR + 350 bps
2. Above 1 year up to 3 years ---------6M LIBOR + 350 bps
These ceilings include management fees, arrangement fees etc.

Example On 12th Feb, a customer has received an Import bill for USD 10000/-. He
asks you to retire the bill to the debit of the account. Considering Exchange
margin 0.15% for TT sales and 0.20% on Bill Selling Rate. What amount
will be debited to the account? Spot rate is 34.6500/34.7200
Spot march = 5000/4500

Rate applied will be Bill Selling Rate

Spot Rate = 34.7200
Add Margin for TT selling (0.15%) = 0.0520
TT selling Rate = 34.7720
Add margin for Bill selling@ 0.20% = 0.0695
Bill Selling Rate = 34.8415

Customers account will be debited with Rs. 348400/- (10000X 34.84) ns.

RATES TO BE APPLIED IN FOREIGN EXCHANGE TRANSACTIONS

Nature of transaction Rate to be applied

Encashing Foreign currency Currency Buying rate
Encashing Traveler Cheques TC Buying rate
Issue of Draft in Foreign currency TT Selling rate
Payment of draft where Nostro account TT Buying rate
stands credited already
Purchase of Export Bill Bill Buying rate
Purchase of Sight Bill i.e. DP under FOBP Bill Buying
Discounting of Usance Bill i.e. DA under Spot rate - Exchange
FUBD Margin + Forward
Premium
Payment of Imports Bill Selling

28
 Repatriation of NRE deposits TT selling
Repatriation of FCNR deposits No rate
Crystallization of Overdue Export Bills on TT Selling rate or
30th day after Notional due date Original Bill buying rate
Whichever is higher
Crystallization of LC liability on 10th day Bill Selling rate or
Contracted rate
Whichever is higher
Retirement of Import Bill Bill Selling rate
Crystallization of Import bill on 10th day If Bill Selling rate or
there is default by the buyer Contracted rate
Whichever is higher
Cancellation of Forward Purchase TT selling rate
Contract on 7th working day after due date
Cancellation of Forward Sales Contract TT buying rate
on 7th Working Day after due date

FOREIGN TRADE RISKS AND ECGC

Risks in Foreign trade risk may be defined as Uncertainty or Unplanned events with
International financial consequences resulting into loss. Types of Risks are as under:
Trade 1. Buyers Risk: Non-Acceptance or non-payment
2. Sellers Risk: Non- shipping or Shipping of poor quality goods or
delay.
3. Shipping Risk: Mishandling, Goods siphoned off, Strike by potters or
wrong delivery.
4. Other Risks:
- Credit Risk
- Legal Risk
- Country Risk
- Operational Risk
- Exchange Risk
5. Country Risk
Provision of risk is made if Exposure to one country is 1% or more of total
assets. ECGC has the list of Country Risk Ratings which can be referred to
by the Banks and the banks can make their own country risk policy.
Risk Export Credit and Guarantee Corporation provides guarantee cover for risks
Classification which can be availed by the banks after making payment of Premium.
of Countries ECGC adopts 7 fold classification covering 204 countries. The list is updated
and published on quarterly basis. The latest classification is as under:
1. Insignificant Risks A1
2. Low Risk A2
3. Moderately Low Risk B1
4. Moderate Risk B2
5. Moderately High Risk C1

29
 6. High Risk C2
7. Very High Risk D
Besides above, 20 countries have been placed in Restricted Cover
Group-1 where revolving limits are approved by ECGC and these are valid
for 1 year..

The other 13 countries are placed in Restricted Cover Group-2 where

specific approval is given on case to case basis by ECGC.
ECGC _ Export ECGC was established in 1964. Export Credit and Guarantee Corporation
Credit and provides guarantee cover for risks which can be availed by the banks after
Guarantee making payment of Premium. Its activities are governed by IRDA.
Corporation The functions of ECGC are 3 fold:
1. It rates the different countries.
2. It issues Insurance Policies.
3. It guarantees proceeds of Exports.
Types of Policies:
1. Standard Policies
It provides cover for exporters for short term exports. These cover
Commercial and Political Risks. The different types of Policies are:
- Shipment (Comprehensive Risk) Policy to cover
commercial and political risks from date of shipment. Default
of 4 months.
- Shipment (Political Risks) Policy.
- Contracts (Comprehensive Risk) Policy for both commercial
and Political risks.
- Contracts (Political Risks) Policy
2. Small Exporters policy
A small exporter is defined whose anticipated total export turnover
for the period of 12 M is not more than 50 lac. The policy is issued
to cover shipments 24 M ahead.

The policy provides cover against Commercial risks and Political

risks covering insolvency of the buyer , failure of the borrower to
make payment due within 2 months from due date, borrowers failure
to accept the goods due to no fault of exporter.
3. Specific Shipment Policy
Commercial risks Failure to pay within 4M. It covers short term
credit not exceeding 180 days.
4. Exports Specific Buyer Policy
Commercial risks Failure to pay within 4M and Political Risks
The other Policies are Exports (specific buyers Policy), Buyers Exposure
Policy, Export Turnover Policy (exporters who pay minimum 10 lac premium
to ECGC are eligible) and Consignment export Policy.
Financial ECGC issues following types of Guarantees for the benefit of Exporters:
Guarantees Packing Credit Insurance
ECIB (WT-PC) Exporters Credit Insurance for Banks (whole Turnover

30
 Packing Credit)
This policy is issued to banks to guarantee export risks:
- For all exporters
- Minimum 25 accounts should be there.
- Minimum assured premium is Rs. 5.00 lac.
- Period of cover is 12M.
- The claim is payable if there is default of 4 Months.
- Premium for fresh covers is 8 paisa per month and for others is 6-9.5
paisa percent per month. It is calculated on average outstanding.
- Percentage of cover ranges from 50-75%
- If due date of export proceeds is extended beyond 360 days,
approval of ECGC is required.
- Claim is to be filed within 6M of report of default to ECGC.
ECIB PC for individual exporters. The advance should be categorized as
Standard Asset. The period of coverage is 12M and %age of cover is 66-
2/3 %. The premium is 12 paisa% per month on highest outstanding.
- Monthly declaration by banks before 10th.
- Approval of Corporation beyond 360 days PC.
- Report of default within 4M from due date.
- Filing of claim within 6M of the report.
ECIB (WT- PS) Whole Turnover Post Shipment Credit Policy
- It is a common policy for all exporters.
- Advances against export bills are covered.
- Premium is 5-9 paisa % per month.
- Cover is usually 60-75%.
- If the cover is taken by exporter individually, the cover increases to
75-90%.
Export Finance When banks make advance to exporters against export incentives
Guarantee receivables like Duty Drawback etc. The cover available is 75% and the
premium ranges from 7 paisa onwards.
Exchange The cover is available for payment schedule over 12 months up to maximum
Fluctuation period of 15 years. Cover is available for payments specified in USD, GBP,
Risk Cover EURO, JPY, SWF, AUD and it can be extended for other convertible
Scheme currencies.
The contract cover provided a franchise of 2% Loss or gain within range of
2% of reference rate will go to the account of the exporter. If the loss
exceeds 2% , the ECGC will make good the portion of loss in excess of 2%
but not exceeding 35%.
The other guarantees are:
- Export Performance Guarantee
- Export Finance (Overseas Lending) Guarantee.
Transfer guarantee cover to the confirming bank in India.

Maturity ECGC provides full fledged Factoring Insurance services. It facilitates

Factoring purchase of account receivables. It provides up to 90% finance against
approved transactions. It follows up collection of sales proceeds. Exporters
of good track record and dealing on DA terms having unexpected bulk

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 orders are eligible to apply.
Common Notice of Default
Guidelines Notice of default must be served within a period of 4 months from due date
or 1 month from date of recall.
Lodging of Claim
The claim should be filed with ECGC within maximum period of 6 months
from date of lodging of Default Notice.

EXIM BANK

Exim Bank its Exim Bank (Export/Import Bank) was established in 1981 with the objective
functions of financing Import Export Trade especially on Long term basis. The
functions of Exim bank are as under:
Offering Finance for Exports at competitive rates.
Developing alternate financial solution
Data and Information about new export opportunities.
Respond to export problems and pursue Policy solutions.

The finance activities of Exim bank consist of :

1. Arranging Suppliers credit and Buyers credit
2. Consultancy and Technical services for exporters
3. Pre-shipment credit over 6 months
4. Setting up of EOU in EPZ (Export Processing Zones)
5. Finance for DTA (Domestic Tariff Area) units exporting minimum
25% of annual sales.
6. Finance for Import of Computer System and Development of
Software. Plant and Machinery and Technical up-gradations etc.
7. Services for Overseas Investments.
8. Line of Credit to exporters on the basis of which they receive export
orders.
EXIM Bank performs following functions for Commercial Banks:
Export Bills Rediscounting Usance period should not exceed 180
days.
SSI Export Bills Rediscounting.
Refinance of Export credit
Refinance of TL to EOU, Software Capital goods up to 100%
Participates with banks in Issuance of Guarantees.
Besides above, the EXIM bank arranges Relending facilities for Overseas
Banks, sanctions direct credit to foreign importers and arranges line of
credit for foreign importers.
DPG (Deferred It is normally beyond 6M and meant for SHE (Status Holder Exporters)
Payment only.
Guarantees Banks can approve proposals up to 25 crore.
Above 25 crore up to 100 crore are referred to EXIM bank.
Above 100 crore proposals will be considered by Inter institutional Working

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 Group consisting of members from RBI, FEDAI, ECGC and EXIM.
Other services Besides above, the EXIM bank provides assistance for :
of EXIM bank 1. Project Exports export of Engineering goods on Deferred
Payment terms
2. Turnkey Projects- supply of equipment along with related services
like design, detailed engineering etc.
3. Construction Projects
4. Funded facilities.
EXIM Bank is nodal agency designated by GOI to manage Export
Marketing Fund (EMF) which consists of loan made available to India by
World bank to promote International Trade.

RESERVE BANK OF INDIA

RBI controls RBI is empowered to

Foreign Control and regulate Foreign Exchange Reserves
Exchange Supervise Foreign Exchange dealings
Maintain external value of Rupee
FERA was replaced by FEMA in the year 1999.
FEMA The important FEMA guidelines with regard to Foreign exchange are as
provisions under:
1. No drawl of exchange for Nepal and Bhutan
2. If Rupee equivalent exceeds Rs. 50000/-, payment by way of
crossed Cheque.
3. During visit abroad, one can carry foreign currency notes up to USD
3000 or equivalent. For Libya and Iraq, the limit is USD 5000 and
the entire amount for Iran and Russian states.
4. Indian citizens can retain and possess foreign currency up to USD
2000 or its equivalent.
5. Unspent currency must be surrendered within a period of 180 days
after arrival in India.
Basic Travel Quota (BTQ)

Purpose of Visit Up to USD or equivalent

Personal/Tourism 10000 per financial year
Business Purpose 25000 per visit
Seminars/conferences 25000 per visit
Employment/Immigration 100000
Studies 100000 per academic year
Medical 100000
Donations/Gifts 5000 per donor per year
Consultancy services 100000 per project
Debit Credit/Credit Card As per BTQ as above
*AD can release Foreign Exchange 60 days ahead of journey

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LRS (Liberalized The scheme is meant for Resident Indians individuals. They can freely
Remittance remit up USD 125000 per financial year in respect of any current or capital
Scheme) account transaction without prior approval of RBI. The precondition is that
the remitter should have been a customer of the bank for the last 1 year.
PAN is mandatory.
Not Applicable
The scheme is not applicable for remittance to Nepal, Bhutan, Pak,
Mauritius or other counties identified by FATF.
The scheme is not meant for remittance by Corporate.
Latest Guidelines
The scheme should not be used for making remittances for any
prohibited or illegal activities such as margin trading, lottery etc., as
hitherto.
Resident individuals have now been allowed to set up Joint
Ventures (JV) / Wholly Owned Subsidiaries (WOS) outside India for
bonafide business activities outside India within the limit of USD
125000
The limit for gift in Rupees by Resident Individuals to NRI close
relatives and loans in Rupees by resident individuals to NRI close
relatives shall accordingly stand modified to USD 1,25,000 per
financial year.
RBI has clarified that Scheme can now be used for acquisition of IP
outside India.
Import and Any person resident in India
Export of Indian a) May take outside India (other than Nepal and Bhutan) currency
Rupees notes up to Rs. 25000/- or
b) May bring into India (from country other than Nepal and Bhutan)
currency notes up to Rs. 25000/-
Any person Resident Outside India (Not being citizen of Pak and
Bangladesh)
a) May take outside India currency up to Rs. 25000/-
b) May bring into India currency notes up to 25000/-
(Previously, the limit was Rs. 10000/-)

Any amount can be taken out while going to Nepal and Bhutan but
denomination of notes not exceeding Rs. 100/-
Restrictions Customer is required to furnish PAN No. for cash remittance beyond
25000/-.
If rupee equivalent is 50000/- and above, the entire payment has to
be made by way of crossed cheque or DD.
RETURNS TO Following important returns are submitted to RBI
BE SUBMITTED R- Returns Forex Operations (Fortnightly)
TO RBI BAL statement Balance in Nostro/Vostro account
STAT 5 Transactions in FCNR B accounts
STAT 8 Transactions in NRE/NRO accounts

34
 LRS Statement UP to USD 200000 (monthly)
Trade Credit Statement Buyers and Suppliers Credit
XOS O/S Overdue Export bills (6M overdue)
BEF Import Remittance effected but Bill of Entry
not submitted for >3M.
ETX Form Seeking relaxation from RBI after expiry of
12M when export proceeds are not received.
RFC accounts Resident Foreign Currency account is opened by Indian residents who
were earlier NRIs and Forex is received by them from their overseas dues:
The accounts can be opened as SB/CA/FD type.
Proceeds are received from overseas.
Out of Monetary benefits accruing abroad
The funds are freely repatriable.
Minimum amount is USD 5000.

RFC- D accounts Resident Foreign Currency (Domestic) accounts are opened:

By Indian residents who visit abroad: and
Bring with them Foreign Exchange;
As honorarium, gift etc.
Unspent money can also be deposited.
These are CA nature accounts and no interest is paid.

FEDAI Foreign Foreign Exchange association of India is a non-profit body established in

Exchange 1958 by RBI. All public sector banks, Private Banks, Foreign Banks and
Dealers Cooperative banks are its members. The functions of FEDAI are:
Association of Forming uniform rules
India Providing training to bankers; and
Providing guidance and information from time to time.
The important rules are:
1. Export Transactions Forex liability must be crystallized into Indian
rupees on 30th day after expiry of NTP at TT selling rate(Notional
Transit Period) in case of Sight bills and on 30th day after notional
due date in case of Usance bills. The rule has since been relaxed
and bank can frame its own rule for nos. of days for
crystallization.
2. Concessional rate of interest is applied up to Notional due date or
up to value date of realization of export dues (whichever is earlier)
3. Import Transactions: For retirement of Import bills whether under LC
or otherwise, Bill selling rate or Contracted selling rate
whichever is higher, will be applied.
DP Bills (sight) are retired after crystallization on 10 th day
after receipt.
DA Bills are retired (crystallized) on Due Date.
4. All Foreign Currency bills under LC, if not retired on receipt, shall be
crystallized into Rupee liability on 10th day after date of receipt of

35
 documents at Bill Selling Rate or contracted rate whichever is
higher.
Normal Transit Period is:
- 25 days for export bills,
- 3 days for Rupee bills drawn under LC and payable locally
- 7 days for rupee bills drawn under LC and payable at other
centers
- 20 days for Rupee bills not drawn under LC.
- For exports to Iraq, normal transit period is 60 days.
Compensation on Delayed payment:
All Foreign Inward remittances up to Rs.1.00 lac should be converted into
Indian Rupees immediately
The proceeds of any Inward remittance should be credited to the account
within 10 days and advice of receipt is to be sent within 3 days, failing
which, compensation @2% above SB rate will be paid to the beneficiary.
Forward Contracts
Exchange contracts will be for definite amount and period.
Contracts must state first and last date of contracts e.g. from 1-31
Jan or from 17th Jan to 16th Feb.
For contracts up to 1 month, option period for delivery may be
specified.
In case of extension of contract, previous contract will be cancelled
at TT Buying rate or TT selling rate as the case may be.
Overdue contracts are liable to be cancelled on 7th working day
after maturity date if no instructions are received. The contracts
must state first and last date of the contract.
Banks are now free to fix their own rates of commission and margin
etc.
AP may be imposed penalty up to 3 times of contravention amount. If
amount is not quantifiable, up to 2.00 lac and up to 5000/- per day is
imposed, if the contravention continues.

ECBs External External Commercial Borrowings are medium and long term loans as
Commercial permitted by RBI for the purpose of :
Borrowings Fresh investments
Expansion of existing facilities
Trade Credit (Buyers Credit and Sellers Credit) for 3 years or more.
Automatic Rout
ECB for investment in Real Estate sector , Industrial sector and
Infrastructure do not require RBI approval
It can be availed by Companies registered under Indian Company
Act.
Funds to be raised from Internationally recognized sources such as
banks, Capital markets etc.
Maximum amount per transaction is USD 20 million with minimum

36
 average maturity of 3 years
USD 750 million with average maturity of 5 years.
All in cost ceiling is :
ECB up to 5 years : 6M LIBOR+350 bps.
ECBs above 5 years: 6M LIBOR+500 bps.

Approval Route
Under this route, funds are borrowed after seeking approval from RBI.
The ECBs not falling under Automatic route are covered under
Approval Route.
Under this route, Issuance of guarantees and Standby LC are not
allowed.
Funds are to be raised from recognized lenders with similar caps of
all-in-cost ceiling.

ADRs American Depository Receipts are Receipts or Certificates issued by US

American Bank representing specified number of shares of non-US Companies.
Depository Defined as under:
Receipts These are issued in capital market of USA alone.
These represent securities of companies of other countries.
These securities are traded in US market.
The US Bank is depository in this case.
ADR is the evidence of ownership of the underlying shares.
Unsponsored ADRs
It is the arrangement initiated by US brokers. US Depository banks create
such ADRs. The depository has to Register ADRs with SEC (Security
Exchange Commission).
Sponsored ADRs
Issuing Company initiates the process. It promotes the companys ADRs in
the USA. It chooses single Depository bank. Registration with SEC is not
compulsory. However, unregistered ADRs are not listed in US exchanges.

GDRs Global Global Depository Receipt is a Dollar denominated instrument with

Depository following features:
Receipts 1. Traded in Stock exchanges of Europe.
2. Represents shares of other countries.
3. Depository bank in Europe acquires these shares and issues
Receipts to investors.
4. GDRs do-not carry voting rights.
5. Dividend is paid in local currency and there is no exchange risk for
the issuing company.
6. Issuing Co. collects proceeds in foreign currency which can be used
locally for meeting Foreign exchange requirements of Import.
7. GDRS are normally listed on Luxembourg Exchange and traded
in OTC market London and private placement in USA.

37
 8. It can be converted in underlying shares.

IDRs Indian Indian Depository Receipts are traded in local exchanges and represent
Deposits security of Overseas Companies.
Receipts
CDF (Currency CDF is required to be submitted by the person on his arrival to India at the
Declaration Airport to the custom Authorities in the following cases:
Form) 1. If aggregate of Foreign Exchange including foreign currency/TCs
exceeds USD 10000 or its equivalent.
2. If aggregate value of currency notes (cash portion) exceeds
USD 5000 or its equivalent.

Form A1 and Form A1 is meant for remittance abroad to settle imports obligations. It is
Form A2 not required if value of imports is up to USD 5000.

Form A2 is meant for remittance abroad on account of any purpose other

than Imports. It is not required if remittance is up to USD 25000.
LIBOR Rate London Interbank Offering rate is the rate fixed at 11 am (London time) at
which top 16 banks in London offer to lend funds in interbank markets.

Interest RBI vide notification no. DBOD.Dir.BC.No.43/04.02.001/2013-14 dated

Subvention 26.08.2013 has informed that Government has decided to increase the rate of
on Export interest subvention on the existing sectors from the present 2% to 3% with
Credit effect from August 1, 2013 on the same terms and conditions.

3. Accordingly, the interest rate chargeable to the exporters will be

reduced as per Base Rate system in the existing sectors eligible for export
credit subvention by the amount of subvention available, subject to a floor rate
of 7%. It should be ensured that the benefit of 3% interest subvention is
passed on completely to the eligible exporters.
1

Foreign It has been decided to liberalize this facility further. Accordingly, AD Category -
Currency I banks may henceforth borrow funds from their Head Office, overseas
Borrowings branches and correspondents and overdrafts in Nostro accounts up to a limit
by ADs from of 100 per cent of their unimpaired Tier I capital as at the close of the
Overseas previous quarter or USD 10 million (or its equivalent), whichever is higher,
as against the existing limit of 50 per cent (excluding borrowings for financing
of export credit in foreign currency and capital instruments).

Trade Credit Banks may approve availing of trade credit not exceeding USD 20 million up

38
Revised RBI to a maximum period of five years (from the date of shipment) for companies
guidelines in the infrastructure sector, subject to certain terms and conditions stipulated
therein.

On a review, it has been decided to allow companies in all sectors to avail of

trade credit not exceeding USD 20 million up to a maximum period of five
years for import of capital goods as classified by Director General of
Foreign Trade (DGFT).

Crystallization RBI has advised that AD will crystallize i.e. convert foreign currency deposit
of Inoperative (with fixed maturity date) into INR, if remains in-operative for 3 years from
Foreign date of maturity.
Currency
Deposits If a deposit account has not been operated for 10 years, the amount will be
transferred to DEAF.

39