final report (1) of kd
TRANSCRIPT
FOREIGN EXCHANGE MANAGEMENT: A STUDY ON EXCHANGE
RISK MANAGEMENT TECHNIQUES OF THE CUSTOMERS OF IOB,
PONDICHERRY.
Done for
Project report submitted in partial fulfillment of the requirement of Pondicherry University for
the award of the degree of
MASTER OF BUSINESS ADMINISTRATION
Submitted By
KARTHIGA. D
(Reg No.1095526)
Under the guidance of
INTERNAL GUIDE: EXTERNAL GUIDE:
Dr. B. CHARUMATHI, Mr. S. RAJARAJAN
Associate Professor Manager (Foreign Exchange Dept)
Department of Management Studies Indian Overseas Bank
School of Management Puducherry.
Pondicherry University
DEPARTMENT OF MANAGEMENT STUDIESSCHOOL OF MANAGEMENTPONDICHERRY UNIVERSITY
PUDUCHERRY- 605 014
MAY-JUNE 2010
DEPARTMENT OF MANAGEMENT STUDIES
SCHOOL OF MANAGEMENT
PONDICHERRY UNIVERSITY
PUDUCHERRY-605014
CERTIFICATE
This is to certify that this project entitled “FOREIGN EXCHANGE MANAGEMENT: A
STUDY ON EXCHANGE RISK MANAGEMENT TECHNIQUES OF THE
CUSTOMERS OF IOB, PONDICHERRY.” done for INDIAN OVERSEAS BANK, Main
Branch, Puducherry, is submitted by KARTHIGA. D, I year MBA (Reg NO. 1095526) to the
Department of Management Studies, School of Management, Pondicherry University in
partial fulfillment of the degree requirement for the award of degree Master of Business
Administration and is certified to be an original and bonafide work.
DR.R.P.RAYA DR.B.CHARUMATHI
Professor & Head of the Department Reader
Place: Puducherry
Date:
DECLARATION
I, KARTHIGA. D, Student of Department of Management Studies, Pondicherry
University, hereby declare that this project report titled “FOREIGN EXCHANGE
MANAGEMENT: A STUDY ON EXCHANGE RISK MANAGEMENT
TECHNIQUES OF THE CUSTOMERS OF IOB, PONDICHERRY” is an
original work done by me and submitted to the Department of Management
Studies, for the award of Master Degree in Business Administration. I further
declare that any part this project itself has not been submitted elsewhere for award
of any degree.
PLACE:
DATE: Signature of the candidate
ACKNOWLEDGEMENT
I am indebted to the powerful Almighty God for all the blessings he showered on me and
for being with me throughout the study.
I place on record my sincere gratitude and appreciation to my project guide
Dr.B.CHARUMATHI, Reader, Department of Management Studies, for her kind co-operation
and guidance which enabled me to complete this project.
I express my sincere thanks to Dr.R.P.RAYA, HOD, Department of Management Studies,
School of Management, Pondicherry University, who provided me an opportunity to do this
project.
I am deeply obliged to Mr.S.RAJARAJAN, Manager (Foreign Exchange Department), Indian
Overseas Bank, Main Branch, Puducherry, for his exemplary guidance and support without
whose help this project would not have been success.
I take this opportunity to dedicate this project to my parents who were a constant source of
motivation and I express my deep gratitude for their never ending support and encouragement
during this project.
Finally I thank each and everyone who helped me to complete this project.
KARTHIGA. D
(Signature of the Candidate)
EXECUTIVE SUMMARY
This report summarizes the result of the project done by Karthiga. D, student of
Department of Management Studies, School of Management, Pondicherry University, at Indian
Overseas Bank, Main Branch, Puducherry. This project aims at a study on the exchange Risk
Management techniques of the customers of Indian Overseas Bank.
The Indian economy has undergone drastic changes in the recent years whereby it ceased
to be a closed and protected economy, and adopted the globalization route, to become a part of
the world economy. In the pre-liberalization era, marked by State dominated, tightly regulated
foreign exchange regime, the only Risk Management tool available for corporate enterprises was,
‘lobbying for government intervention’. With the advent of LERMS (Liberalised Exchange Rate
Mechanism System) in India, in 1992, the market forces started to present a regime with steady
price volatility as against the earlier trend of long periods of constant prices followed by sudden,
large price movements. The unified exchange rate phase has witnessed improvement in
informational and operational efficiency of the foreign exchange market, though at a halting
pace.
In the corporate finance literature, research on Risk Management has focused on the
question of why firms should hedge a given risk. This project tells us that measuring risk
exposures is an essential component of a firm's Risk Management strategy. Without knowledge
of the primitive risk exposures of a firm, it is not possible to test whether firms are altering their
exposures according to the global market. The First generation derivative instruments are the
most popular and most preferred one - Forward contracts. In my project, the study is done based
on these Forward contracts which were considered as the most important hedging tool
undertaken by the customers of the Indian Overseas Bank, Pondicherry Branch.
In addition to the traditional instruments like the Forward contracts, the Second-
generation instruments, namely Swaps and Futures have also come into use. This is followed by
the Third Generation category, the Rupee-Dollar Options that are being largely preferred.
Corporate enterprises have had to face the challenges of the shift from low risk to high
risk operations involving foreign exchange. There was increasing awareness of the need for
introduction of financial derivatives in order to enable hedging against market risk in a cost
effective way. Earlier, the Indian companies had been entering into Forward contracts with
banks, which were the Authorized Dealers (AD) in foreign exchange. But many firms preferred
to keep their risk exposures un-hedged as they found the Forward contracts to be very costly. In
the current formative phase of the development of the foreign exchange market, it will be
worthwhile to take stock of the initiatives taken by corporate enterprises in identifying and
managing foreign exchange risk.
This study gives an outlook in the area of NRI accounts and the Pre-shipment and Post-
shipment advances provided to the customers. This gives an idea about the current position of
these facilities granted to their customers.
The spurts in foreign investments in India have led to substantial increase in the quantum
of inflows and outflows in different currencies, with varying maturities. This study also tells us
how the banks are managing their inflow and outflow of their currencies. It is also examined
whether this branch of the bank can manage their import remittances through their own export
payments without going to the foreign exchange markets.
INTRODUCTION
1.1 INTRODUCTION TO THE TOPIC
The importance of Risk Management has been extensively recognized by banks and
securities firms when deciding the amount of risk they are willing to take. Moreover, bank
regulators now put an emphasis on Risk Management practices in attempting to reduce the
fragility of financial and banking system.
India had earlier followed a tightly regulated foreign exchange regime. The liberalization
of the Indian economy started in 1991. The 1992-93 Budget provided for partial convertibility of
Indian Rupee in current accounts and, in March 1993, the Rupee was made fully convertible in
current account. Demand and supply conditions now govern the exchange rates in our foreign
exchange market. A fast developing economy has to cope with a multitude of changes, ranging
from individual and institutional preferences to changes in technology, in economic policies, in
regulations etc. Besides, there are changes arising from external trade and capital account
interactions. These generate a variety of risks, which have to be managed. There has been a
sharp increase in foreign investment in India. Multi-national and transnational corporations are
playing increasingly important roles in Indian business. Indian corporate units are also engaging
in a much wider range of cross border transactions with different countries and products. Indian
firms have also been more active in raising financial resources abroad. All these developments
combine to give a boost to cross-currency cash flows, involving different currencies and different
countries.
With increased emphasis on Risk Management in business, the use and varieties of
derivatives have multiplied. Similarly in the management of foreign exchange, derivatives have
a significant role to play.
1.2 NEED FOR THE STUDY
The face of banking in India is changing rapidly. The enhanced role of the banking
sector in the Indian economy, the increasing levels of deregulation along with the increasing
levels of competition have facilitated globalization, thus, leading the corporate and banks to face
various challenges and risks.
The major risk the global firms face is the exchange risk which is caused by the
fluctuations in the exchange rates. These fluctuations have created unbalanced profit and loss
patterns to the global business firms. Thus, in order to reduce these risks, the corporate make
use of the various derivative instruments available with the banks.
The utmost need for this project is to ensure whether the customers of Indian Overseas
Bank are aware of the exchange risks and the tools used to mitigate them. Further, this study
also deals with the analysis of the present trend of the NRI accounts and other facilities provided
to the customers by the bank.
1.3. STATEMENT OF THE PROBLEM
International transactions are exposed to various risks. This study makes an attempt to
know about the exchange risk and to understand exchange Risk Management techniques
employed at Indian Overseas Bank, Puducherry.
1.4 OBJECTIVES OF THE STUDY
The objectives as this study can be as follows:
1.4.1 PRIMARY OBJECTIVE
The foremost objective of this project is to understand the Risk Management Techniques
employed at Indian Overseas Bank, Puducherry.
1.4.2 SECONDARY OBJECTIVE
Further, this study also attempts to,
Analyze the trend of the NRI deposits at the Bank.
Identify the problems associated with Pre-Shipment and Post-Shipment advances
available to their clients.
Examine the relationship between the inflow and outflow of foreign currencies at the
branch level.
1.5 RESEARCH METHODOLOGY
All the findings and conclusions obtained in this report are based on the data available in
the bank and the conversation made with the customers of the bank.
1.5.1 RESEARCH DESIGN:
This Research was initiated by examining the secondary data to gain insight into the
situation prevailing in the bank. By analyzing the secondary data, the study aim is to explore the
short comings of the present system and primary data will help to validate the analysis of
secondary data besides on unrevealing the areas which calls for improvement.
1.5.2 COLLECTION OF DATA:
The data collected for this project is primary as well as secondary data.
Primary data:
A telephonic interview was made to the people of different profession. Some
were also personally visited and interviewed. They were the main source of Primary
data. The method of collection of primary data was direct personal interview through
word-of-mouth.
Secondary Data:
The secondary data was collected from internal sources. It was collected on the
basis of bank’s books of accounts, organizational file, official records, preserved
information in the bank’s database and their official website.
1.5.3 SAMPLING PLAN:
Sampling Units: The managerial professionals dealing with export and imports of
different companies were interviewed. The basic criterion is that their company should
maintain an account with the Indian Overseas Bank’s forex department, Puducherry.
Research Instrument: The managerial professionals were contacted through telephone
from the bank since they were situated in different areas. The customers who came to
bank were also asked the same questions.
Contact Method: Personal interview and Telephonic interview.
1.5.4 SAMPLE SIZE:
My sample size for this project is 28 respondents. The entire customers who deal with
import and export business was considered for this study. The telephonic interview method was
selected due to the geographical location of the customers as well as the number of customers
was very low.
1.5.5 RESEARCH LIMITATIONS:
Though I have covered all the customers of the Indian Overseas Bank the number of
customers was very low since it is a very small branch.
1.5 LIMITATIONS OF THE STUDY:
The operations of the Indian Overseas Bank are subject to certain limitations
which are identified as follows:
The study is done only at a micro level and is restricted to the Pondicherry branch. The
customers were less in number and whatever analyzed was limited to that extent.
The secondary data collected and taken into consideration in order to fulfill the objectives
of this project includes the data recorded in their books of accounts and the data available
from the website of the Bank. The data used for analysis cover a period of 4 years
starting from April, 2006 to March, 2010 and whatever analyzed is limited to the same
period.
The scope is limited to the types of foreign currency accounts that are currently
maintained in this branch and therefore the other types of foreign currency accounts that
are in existence are excluded.
1.7. CHAPTERIZATION:
Chapter 1: This chapter mainly deals with an introduction to the topic of study. It gives an
idea about the primary objective of the study and the problem to be addressed. It says about the
research methodology and tools used for analysis.
Chapter 2: This chapter gives an introduction to the banking industry and a detailed the
profile of the Indian Overseas Bank. It also gives an in depth study about the organization viz.,
IOB. It includes information right from the inception of the bank and its subsidiaries and their
financial highlights. Further, information is provided regarding the Forex Department of the
Bank, which has its inception since 1948.
Chapter 3: This chapter provides the conceptual framework about the topic of study. It gives
an introduction to the International Business. It explains about the Risk Management techniques
and the derivatives used to mitigate the exchange risk. It also gives an insight into various types
of exchange rates, different types of NRI accounts, Pre-Shipment and Post-Shipment advances.
It justifies the need for the study.
Chapter 4: This chapter provides the detailed analysis of the primary data collected through
telephonic interview and secondary data collected from the organization. It is followed by
interpretation of the same.
Chapter 5: This chapter indicates the summary of findings, suggestions and conclusion of the
analysis done in Chapter 4.
CHAPTER 2
2.1 AN INTRODUCTION TO INDIAN BANKING INDUSTRY:
The Indian Banking industry, which is governed by the Banking Regulation Act of India,
1949 can be broadly classified into two major categories, non-scheduled banks and scheduled
banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of
ownership, commercial banks can be further grouped into nationalized banks, the State Bank of
India and its group banks, regional rural banks and private sector banks (the old/ new domestic
and foreign). These banks have over 67,000 branches spread across the country.
The first phase of financial reforms resulted in the nationalization of 14 major banks in
1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a
significant growth in the geographical coverage of banks. Every bank had to earmark a minimum
percentage of their loan portfolio to sectors identified as “priority sectors”. The manufacturing
sector also grew during the 1970s in protected environs and the banking sector was a critical
source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980.
Since then the number of scheduled commercial banks increased four-fold and the number of
bank branches increased eightfold.
After the second phase of financial sector reforms and liberalization of the sector in the
early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete with the
new private sector banks and the foreign banks. The new private sector banks first made their
appearance after the guidelines permitting them were issued in January 1993. Eight new private
sector banks are presently in operation. These banks due to their late start have access to state-of
the-art technology, which in turn helps them to save on manpower costs and provide better
services.
During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a
25 percent share in deposits and 28.1 percent share in credit. The 20 nationalized banks
accounted for 53.2 percent of the deposits and 47.5 percent of credit during the same period. The
share of foreign banks (numbering 42), regional rural banks and other scheduled commercial
banks accounted for 5.7 percent, 3.9 percent and 12.2 percent respectively in deposits and 8.41
percent, 3.14 percent and 12.85 percent respectively in credit during the year 2000.
Current Scenario
The industry is currently in a transition phase. On the one hand, the PSBs, which are the
mainstay of the Indian Banking system, are in the process of shedding their flab in terms of
excessive manpower, excessive non Performing Assets (NPAs) and excessive governmental
equity, while on the other hand the private sector banks are consolidating themselves through
mergers and acquisitions.
Private sector Banks have pioneered internet banking, phone banking, anywhere banking,
mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various other
services and integrated them into the mainstream banking arena, while the PSBs are still
grappling with disgruntled employees in the aftermath of successful VRS schemes. Also,
following India’s commitment to the W To agreement in respect of the services sector, foreign
banks, including both new and the existing ones, have been permitted to open up to 12 branches
a year with effect from 1998-99 as against the earlier stipulation of 8 branches.
Meanwhile the economic and corporate sector slowdown has led to an increasing number
of banks focusing on the retail segment. Many of them are also entering the new vistas of
Insurance. Banks with their phenomenal reach and a regular interface with the retail investor are
the best placed to enter into the insurance sector. Banks in India have been allowed to provide
fee-based insurance services without risk participation, invest in an insurance company for
providing infrastructure and services support and set up of a separate joint-venture insurance
company with risk participation.
Governmental Policy
After the first phase and second phase of financial reforms, in the 1980s commercial
banks began to function in a highly regulated environment, with administered interest rate
structure, quantitative restrictions on credit flows, high reserve requirements and reservation of a
significant proportion of lendable resources for the priority and the government sectors. The
restrictive regulatory norms led to the credit rationing for the private sector and the interest rate
controls led to the unproductive use of credit and low levels of investment and growth. The
resultant ‘financial repression’ led to decline in productivity and efficiency and erosion of
profitability of the banking sector in general. This was when the need to develop a sound
commercial banking system was felt. This was worked out mainly with the help of the
recommendations of the Committee on the Financial System (Chairman: Shri M. Narasimham),
1991. The resultant financial sector reforms called for interest rate flexibility for banks, reduction
in reserve requirements, and a number of structural measures. Interest rates have thus been
steadily deregulated in the past few years with banks being free to fix their Prime Lending Rates
(PLRs) and deposit rates for most banking products. Credit market reforms included introduction
of new instruments of credit, changes in the credit delivery system and integration of functional
roles of diverse players, such as, banks, financial institutions and non banking financial
companies (NBFCs). Domestic Private Sector Banks were allowed to be set up, PSBs were
allowed to access the markets to shore up their Cars.
The Indian banking system is financially stable and resilient to the shocks that may arise
due to higher non-performing assets (NPAs) and the global economic crisis, according to a stress
test done by the Reserve Bank of India (RBI).
Significantly, the RBI has the tenth largest gold reserves in the world after spending US$
6.7 billion towards the purchase of 200 metric tonnes of gold from the International Monetary
Fund (IMF) in November 2009. The purchase has increased the country's share of gold holdings
in its foreign exchange reserves from approximately 4 per cent to about 6 per cent.
In the annual international ranking conducted by UK-based Brand Finance Plc, 20 Indian
banks have been included in the Brand Finance® Global Banking 500. In fact, the State Bank of
India (SBI) has become the first Indian bank to be ranked among the Top 50 banks in the world,
capturing the 36th rank, as per the Brand Finance study. The brand value of SBI increased from
US$ 1.5 billion in 2009 to US$ 4.6 billion in 2010. ICICI Bank also made it to the Top 100 list
with a brand value of US$ 2.2 billion. The total brand value of the 20 Indian banks featured in
the list stood at US$ 13 billion.
Meanwhile, loan disbursement from scheduled commercial banks which included
regional rural banks as well posted a growth of 16.04 per cent by March 12, 2010, on a year-on-
year basis, as per the latest data released by RBI. The RBI had earlier predicted that the credit
growth during 2009-10 would be around 16 per cent.
Following the financial crisis, new deposits have gravitated towards public sector banks.
According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial
Banks: September 2009', nationalised banks, as a group, accounted for 50.5 per cent of the
aggregate deposits, while State Bank of India (SBI) and its associates accounted for 23.8 per
cent. The share of other scheduled commercial banks, foreign banks and regional rural banks in
aggregate deposits were 17.8 per cent, 5.6 per cent and 3.0 per cent, respectively.
With respect to gross bank credit also, nationalised banks hold the highest share of 50.5
per cent in the total bank credit, with SBI and its associates at 23.7 per cent and other scheduled
commercial banks at 17.8 per cent. Foreign banks and regional rural banks had a share of 5.5 per
cent and 2.5 per cent respectively in the total bank credit.
The report also found that scheduled commercial banks served 34,709 banked centres. Of
these centres, 28,095 were single office centres and 64 centres had 100 or more bank offices.
The confidence of non-resident Indians (NRIs) in the Indian economy is reviving again.
NRI fund inflows increased since April 2009 and touched US$ 47.8 billion on March 2010, as
per the RBI's June 2010 bulletin. Most of this has come through Foreign Currency Non-resident
(FCNR) accounts and Non-resident External Rupee Accounts.
Foreign exchange reserves were up by US$ 1.69 billion to US$ 272.8 trillion, for the
week ending June 11, on account of revaluation gains. June 21, 2010.
Major Developments:
The Monetary Authority of Singapore (MAS) has provided qualified full banking (QFB)
privileges to ICICI Bank for its branch operations in Singapore. Currently, only SBI had QFB
privileges in country.
The Indian operations of Standard Chartered reported a profit of above US$ 1 billion for
the first time. The bank posted a profit before tax (PAT) of US$ 1.06 billion in the calendar year
2009, as compared to US$ 891 million in 2008.
Punjab National Bank (PNB) plans to expand its international operations by foraying into
Indonesia and South Africa. The bank is also planning to increase its share in the international
business operations to 7 per cent in the next three years.
The State Bank of India (SBI) has posted a net profit of US$ 1.56 billion for the nine
months ended December 2009, up 14.43 per cent from US$ 175.4 million posted in the nine
months ended December 2008.
Amongst the private banks, Axis Bank's net profit surged by 32 per cent to US$ 115.4
million on 21.2 per cent rise in total income to US$ 852.16 million in the second quarter of 2009-
10, over the corresponding period last year. HDFC Bank has posted a 32 per cent rise in its net
profit at US$ 175.4 million for the quarter ended December 31, 2009 over the figure of US$
128.05 million for the same quarter in the previous year.
Government Initiatives:
The government plans to invest US$ 3.63 billion into public sector banks to aid them for
maintaining their Capital Adequacy Ratio (CAR), as per the Union Budget presented by the
Union Finance Minister in February 2010. Out of the total allocation, US$ 2.1 billion would be
used for recapitalisation of the public sector banks during April-June 2010 and US$ 1.5 billion
will be invested during the rest of 2010-11.
The RBI has allowed banks to make changes in the repayment schedules or drawdown
without prior approval from the central bank. However, such a change could be made on the
condition that the average maturity of the loan should remain the same. The move is expected to
make external commercial borrowing (ECB) transactions easier. Transactions both through
automatic and approval routes can take advantage of this change. Now, without the prior
approval of RBI, Indian companies may borrow up to US$ 500 million in a year.
Further, RBI also allowed domestic scheduled commercial banks to open up their
branches in Tier III to Tier VI regions that have population of up to 49,999 without the prior
permission of the central bank. Banks such as PNB and UCO Bank are planning to take
advantage of this initiative and would open around 440 and 89 branches, respectively, in such
regions.
In its platinum jubilee year, the RBI, the central bank of the country, in a notification
issued on June 25, 2009, said that banks should link more branches to the National Electronic
Clearing Service (NECS). Ideally, all core-banking-enabled branches should be part of NECS.
NECS was introduced in September 2008 for centralised processing of repetitive and bulk
payment instructions. Currently, a little over 26,000 branches of 114 banks are enabled to
participate in NECS.
The repo rate and the reverse repo rate were increased by 25 basis points each in mid-March
2010.
The Monetary Policy Statement 2010-11, dated April 20, 2010, specifies the following monetary
measures:
i. The repo rate has been raised by 25 basis points from 5.0 per cent to 5.25 per cent with
immediate effect.
ii. The reverse repo rate has been raised by 25 basis points from 3.5 per cent to 3.75 per cent
with immediate effect.
iii. The cash reserve ratio (CRR) of scheduled banks has been raised by 25 basis points from
5.75 per cent to 6.0 per cent of their net demand and time liabilities (NDTL) effective the
fortnight beginning April 24, 2010.
Meanwhile, outstanding bank credit in the 15 days up to January 29, 2010 rose by US$
4.32 billion, pointing to a revival in credit growth. This is the highest year-on-year growth
recorded since August 14, 2009. Furthermore, the outstanding bank credit in the 15 days up to
February 12, 2010, rose by US$ 4.87 billion to US$ 658.24 billion, according to data from the
Reserve of Bank of India (RBI), marking a 15.07 per cent year-on-year growth in credit.
2.2 PROFILE OF THE BANK
INDIAN OVERSEAS BANK: INTRODUCTION
Indian Overseas Bank (IOB) was founded on 10th February 1937 and has distinction of
three branches at Chennai, Karaikudi and Rangoon(Myanmar) simultaneously commencing
business on the inaugral day. The founder Chairman was M. Chidambaram Chettiyar. It was
started with a vision to specialise in foreign exchange and overseas banking business in India.
At the dawn of Independence, IOB had 38 branches in India and 7 branches abroad. Its
deposits stood at Rs.6.64 Crores and advances at Rs.3.23 Crores at that time. Before 1969, it has
ventured into consumer credit, had begun with computerisation and had 195 branches in India.
In 1969, when it was nationalised, the bank has 208 branches with aggregate deposits of Rs.
67.70 Crores and advances of Rs. 44.90 Crores.
IOB is currently one if the major banks based in Chennai, with 1845 domestic branches
and 12 branches overseas. IOB also has an ISO certified in house information technology
department, which has devloped the software that most of its branches use to provide online
banking to customers. IOB has a network of more than 500 ATMs all over India and IOB’s
international visa debit card is accepted at all the ATMs. IOB offers internet banking (E-see
banking) and is one of the banks that the government of India has approved for online payment
of taxes.
IOB provides various banking services, including saving bank, current account, credit
facilities nad other services. IOB also provides Non residential Indian (NRI) services, personal
banking, foreign exchange reserves (FOREX) collection services, agri-business consultancy,
credit card and e-bankng services. The bank is also engaged in merchant banking. IOB is the
first public sector bank in the country to introduce mobile banking services using wireless
application protocol (WAP). It was also the first public sector bank to introduce anywhere
banking at its 129 branches in the four metros ans is extending the connectivity to 100 other
branches in Hyderabad, Bangalore, Ahemedabad and Ludhiana.
IOB was the first bank to venture into consumer credit, as it introduced the popular
Personal Loan scheme. In 1964, the Bank started computerization in the areas of inter-branch
reconciliation and provident fund accounts. After nationalization, the Bank emphasized on
opening its branches in the rural parts of India. In 1979, IOB opened a Foreign Currency
Banking Unit in the free trade zone in Colombo.
In the year 2000, Indian Overseas Band undertook an initial public offering (IPO) that
brought the government's share in the bank's equity down to 75%. The equity shares of IOB are
listed in the Madras Stock Exchange (Regional), Bombay Stock Exchange, and National Stock
Exchange of India Ltd., Mumbai. Since its inception, IOB has absorbed various banks including
the latest Bharat Overseas bank in 2007.
2.2.1 SERVICES PROVIDED AT IOB
The usual banking services by Indian Overseas Bank are mentioned below:
DEPOSITS:
Saving Bank Deposits
No Frills SB Accounts
Current Account
Fixed Deposit
Reinvestment Deposit
Recurring Deposit Account
Annuity Deposit Plan
Multiple Investment Scheme
Cumulative Benefit Deposit
Multiple Deposit Account
LOANS:
Personal Loan
Car Loan
Commercial Vehicle Loan
Corporate Loans
Housing Loan
Home Improvement Loan
Educational Loan
NRI Home Loans
Agricultural Loans
Finance For Small, Medium And Large Enterprises
NRI SERVICES:
NRE Accounts
NRO Savings Account
RFC Accounts
FCNR Account
Remittance Services
OTHER SERVICES AND PRODUCTS:
VISA International Credit Cards
VISA Debit Card
IOB Fine Gold
Real Time Gross Settlement (RGTS)
Forex Collection Services
Agriculture and Business Consultancy Service
Investment options like Mutual Funds and Shares
2.2.2 INTERNET BANKING:
‘Internet’ Banking is the trade name of the bank’s Internet Banking service which
provides access to account information, products and other services as advised by the Bank from
time to time to the Bank's customers through the Internet. Internet Banking, Electronic Banking,
E-Banking and Internet Banking services/facility may be interchangeably used.
The facility of Internet Banking is provided only as a convenience to the customer and
the customer may avail the facility at his/her own risk. By having an account with the Bank
and/or using of this facility the customer agrees unconditionally not to contest any transaction
carried out or not carried out by the Bank, over Internet Banking, and shall accept the record of
the transaction maintained by the Bank, without any doubt or protest, and hold the Bank
harmless and blameless against any loss, or consequences thereof, arising from any transaction
carried out or not carried out over Internet Banking. Against the above background, the
customer can use any services provided by the Bank over Internet.
2.2.3 PERFORMANCE HIGHLIGHTS
The Bank’s global business reached Rs. 1,75,926 crore as at 31st March 2009 resulting in
an increase of 21.01% over last year’s figure ie. Rs. 1,45,383 crore.
Deposits of the Bank registered an healthy year-on-year growth of Rs. 15,790 crore
(18.72%) during the year 2008-09, thereby crossing the milestone of Rs. 1,00,000 crore.
Operating profit for the Bank was Rs. 2,524 crore as on 31.03.2009 showing a growth of
26.07% compared to last year due to expansion in volume of business and substantial
treasury gains.
Net Profit reached a level of Rs. 1,326 crore at the end of the year registering an increase
of 10.32% through improvement in yield on advances and non-interest income.
The Bank’s Net Profit as a percentage of Average Networth stood at 24.80%.
The total Net Interest Income improved to Rs. 2,870 crore when compared to Rs.
2,450 crore last year, registering a growth of 17.13%.
2.3 Indian Overseas Bank: Pondicherry Branch
The Pondicherry branch of Indian Overseas Bank was commenced in the year 1948. This
branch has got its AD (Authorized Dealer) status for more than 40 years. Being one among the
oldest bank of Pondicherry, Indian Overseas Bank has got an esteemed status in the minds of the
customers residing at Pondicherry.
Highlights about the Pondicherry Branch:
Till the year 1992, the bank was 100% manually operated. All the transactions were
recorded in the books. No computers were used.
In the year 1993, the bank was under partial automation. They used the ALPM
(Automatic Ledger Posting Machines) in some departments of the bank.
In the year 1995, the bank has started to operate with full automation. All the employees
of the bank were trained and given individual computer to operate with.
In the year 2005, they have implemented networking. All the branches were under a
single networking system.
From September 2009, this branch was allowed direct SWIFT (Society for Worldwide
Interbank Financial Telecommunication) connectivity. Now they can directly enter their
transactions through SWIFT.
CHAPTER 3
3.1 INTRODUCTION TO INTERNATIONAL BUSINESS:
An organization to become global does not mean that it shall necessarily do business
globally but it is essential that it should be able to survive the global competition. Globalization
is important because a Company that fails to go global is in the danger of losing its domestic
business to competitors with lower costs, greater experience, better products and in a nutshell,
more value for the customer. Despite all the harmful effects and criticisms against it,
globalization has come to stay; it is, indeed, becoming more pervasive.
A firm may be motivated or provoked to go international due to the pull factors (those
forces of attraction which pull the business to the foreign market) or push factors (compulsions
of the domestic market which prompt companies to go global).
The degree and nature of involvement in international business or the international
orientation of companies vary widely. The important forces driving globalization are economic
policy liberalization, growth of MNCs, technological advances, transportation and
communication revolution, and increasing competition.
On the other hand there are also forces which restrain globalization. Factors which
restrain the globalization trend include government policies and controls which restrain cross-
border business, social and political opposition against foreign business, management myopia,
which comes in the way of a global orientation, etc.
A firm which plans to go international has to make a series of strategic decisions. They
are international business decision, market selection decision, foreign market entry and operating
decisions, marketing mix decision, and international organization decision.
3.2 Introduction to Foreign Exchange:
Any economic transaction that happens between residents of two countries involves
exchange of one currency into another. A resident may import goods or services from abroad or
export them from his country. An investor may find that investing abroad gives him higher
returns. A tourist who visits another country requires the currency of the country he visits to
meet his expenses there. In all these cases, the source of purchasing power is available in one
currency whereas its use is in another currency. Each currency has geographical jurisdiction to
function as legal tender in settlement of debts. Beyond the country of issue, barring few
exceptions, a currency cannot function as legal tender. When the above transactions are
executed, through the intermediation of banks, currencies are converted from one form to
another. These transactions can broadly be classified into trade transactions and non-trade
transactions. Import and export of goods and services are trade transactions. Going abroad on
tour or getting medical treatment abroad are examples of non-trade transactions.
3.2.1 Foreign Exchange: Meaning
Foreign exchange is a mechanism by which the currency of one country gets converted
into the currency of another country. Foreign exchange include foreign currency, balances kept
abroad, instruments payable in foreign currencies and instruments drawn abroad but payable in
Indian currency. It also refers to foreign currencies themselves, since they cannot function as
legal tender, but yet serve the purpose of exchange of values.
3.2.2 Uses of Foreign Exchange
Foreign exchange is earned by the country by transactions that involve inflow of
purchasing power into the country. These may be export of goods and services, foreign
investments in the country, borrowings from abroad, etc. Foreign exchange is spent on payment
for import of goods and services, investments abroad, lending abroad, etc. Primarily, foreign
exchange is earned by exports and is spent on imports. It cannot be created within the country.
Therefore, the efforts of every country would be to balance the earnings and spending of foreign
exchange. Since spending is easier than earning, many countries face the problem of shortage of
foreign exchange. Therefore the need arises for regulating or controlling of foreign exchange.
3.2.3 History of Exchange Control in India
Exchange control was introduced in India on September 1939 on the outbreak of the
Second World War. In the closing stages of the war, it became clear that control over foreign
exchange transactions would have to continue in some form or the other in the post-war period in
the interest of making the most prudent use of foreign exchange resources. Therefore, it was
decided to place the control on a statutory basis and the Foreign Exchange Regulation Act
(FERA) of 1947 was enacted.
It was found necessary to continue exchange control introduced during the Second World
War on a systematic and long-term basis, in view of the substantial requirements of foreign
exchange for the planned developmental efforts undertaken. Over the years, the scope if
exchange for the planned development efforts undertaken. Over the years, the scope of exchange
control in India steadily widened and the regulations became progressively more elaborate with
the increasing foreign exchange outlays under successive Five-Year plans and the relatively
inadequate earning of foreign exchange. Periodically, appraisals and reviews of policies and
procedures were undertaken and such modifications made as were warranted by changes in the
national policies and priorities, and fluctuations in the level of foreign exchange reserves caused
by both national and international economic and other developments. Under these circumstances
the Foreign Exchange Regulation Act (FERA) of 1973 was passed to replace the Act of 1947.
FERA: Definition
The purpose of enactment of this act was to consolidate and amend the law regulating
certain payments, dealing in foreign exchange and securities transactions indirectly affecting
foreign exchange and the import and export of currency and bullion, for the conservation of the
foreign exchange resources of the country and the proper utilization thereof in the interest of the
economic development of the country.
Transformation of FERA to FEMA:
The Foreign Exchange Regulation Act (FERA) of 1973 was reviewed in 1993 and
several amendments were enacted as part of the on-going process of economic liberalization
relating to foreign investments and foreign trade for closer interaction with the world economy.
Significant developments took place after 1993such as substantial increase in our foreign
exchange reserves, growth in foreign trade, rationalization of tariffs, current account
convertibility, liberalization of Indian investments abroad, increased access to external
commercial borrowings by Indian corporate and participation of foreign institutional investors in
our stock markets. This needed a change in the outlook of the statue governing the foreign
exchanges transactions from one of control and conservation to that if encouragement and
promotion. The Foreign Exchange Management Act, 1999 was introduced to provide the
necessary change.
FEMA: Definition
The Foreign Exchange Management Act, (FEMA) 1999 seeks to bring the law on the
subject up to date keeping in view the changed environment. This Act aims at consolidating and
amending the law relating to Foreign Exchange with the objective of facilitating external trade
and payments and for promoting the orderly development and maintenance of foreign exchange
markets in India.
3.2.4 Foreign exchange risk management:
Foreign exchange is considered as a rare commodity and was subject to strict control in
almost all countries of the world till 1970s. Exchange control was the order of the day. Today,
we talk of exchanges management and not exchange control. But the fact is that foreign
exchange management from the national point of view is only exchange control or regulation,
though in a diluted form.
The term exchange control refers to the control, by the Government or centralized agency
of transaction involving foreign exchange. In a broad sense, any stipulation or regulation which
restricts the free play of forces in the foreign exchange market can be termed exercise of
exchange control. The rate of exchange under exchange control regime tends to be different
from the one that would exist in the absence of such control.
The origin of exchange control can be traced to 19th century. After the First World War,
many countries of Europe found themselves with depleted gold reserves and foreign exchange.
They imposed payment restrictions to prevent massive capital withdrawals and stability in the
domestic economy. Since then exchange control has been adopted by a large number of
countries and for different purposes.
With the onset of globalization and liberalization beginning at the commencement of
1990’s the tendency throughout the world has been that of relaxing exchange control. Even
earlier, some countries like USA proclaimed that they had no exchange control. But the fact is,
even today, exchange control exits in all countries, with varying intensity.
3.3 Risk Management:
The face of banking in India is changing rapidly. The enhanced role of the banking sector
in the Indian economy, the increasing levels of deregulation along with the increasing levels of
competition have facilitated globalization of the India banking system and placed numerous
demands on banks. Operating in this demanding environment has exposed banks to various
challenges and risks.
TYPES OF RISK
The banking industry has long viewed the problem of Risk Management as the need to
control four of the above risks which make up most, if not all, of their risk exposure, viz., credit,
interest rate, foreign exchange and liquidity risk. While they recognize counterparty and legal
risks, they view them as less central to their concerns.
3.3.1 DERIVATIVES USED FOR MITIGATION OF RISK:
A derivative is a financial instrument whose value is dependent on some other
fundamental variable. With increased emphasis on Risk Management in business, the use and
varieties of derivatives have multiplied. Derivatives are now available for almost all risks in
business. In the management of foreign exchange risk also, derivatives have important role to
play. Traditionally Forward contracts were the instruments used by corporate to hedge their
currency exposures. Forward contract is also a derivative. Therefore, corporate were using
derivatives even before the term gained currency. The scope of currency Risk Management has
improved now with the availability of other derivatives like options, futures and swaps in
addition to the traditional Forward contracts.
TYPES OF INSTRUMENTS:
Based on the nature of the instruments available in the currency markets, the contract
terms have been classified as Forwards, futures, options and swaps.
Forward contracts:
A ‘Forward contract’ is an arrangement whereby an agreed amount of foreign currency is
bought or sold for a specified future delivery at a predetermined rate of exchange. The parties to
the contract may be a bank and its customers. The contract may also be between two banks. A
Forward contract is an OTC (Over The Counter) product and is available at the counters of the
banks dealing in foreign exchange. An exporter who had a receivable due six months hence may
hedge his position by entering into a Forward contract when he apprehends that the currency in
which the transaction is denominated will depreciate in future. The size and other terms of
contract can be tailor-made to the requirements of the customer. Hence Forward contracts
provide perfect hedge. But the opportunity to gain from favorable movement in the rates is also
lost.
Futures:
‘Futures’ is a standardized form of Forward contracts available at specified exchanges.
The size of the contract and the due date are fixed by the exchange concerned. For a hedger,
futures does not afford perfect cover since he has to decide to under-cover or over-cover his
actual exposure. For instance, the futures in Euro in Chicago exchange is of the size of EUR
100,000 and is available for delivery in March, June, September and December months. A fund
manager finds that his exposure is EUR 150,000 and due in August. He can take position in one
Euro futures (under cover) or two Euro futures (over-cover). The futures cab be bought due June
(short cover) or due September (extended cover). The advantage of futures is that since it is a
standardized product, the cost of hedging may be cheaper as compared to other derivatives.
Options:
Both forwards and futures bestow the right to buy or sell a foreign currency; they also
impose an obligation to execute the contract on the due date. ‘Option’ is a derivative which
gives the buyer a right to buy or see a certain amount of specified foreign currency on a specified
future date at a pre-determined date, but without any obligation to do so. On the due date, the
buyer of the option can review the situation in the market and exercise his right and let the option
if it is advantageous to him; otherwise he can simply renounce his right and let the option expire.
The option, of course, comes with a cost. It is available for the consideration of a premium
payable upfront and non refundable whether the option is exercises or not on the due date.
Swaps:
Financial swap is an arrangement whereby the financial streams are exchanges between
two parties. The purpose is to use their comparative advantage in the market for raising the
funds and use it to their mutual advantage. Both the parties may benefit in the form of lowered
cost of borrowing. The swaps are also now offered by banks as products whereby the borrowers
can exchange the fixed interest borrowings into floating rates and vice versa. The exchange can
also be financial streams in two currencies. They may be classified into two types:
Credit Default Swaps - Credit derivatives are being used by almost all the banks now. Out of a
total of $250 trillion of derivative contracts traded round the world, more than 50% are in form
of credit derivatives. Then banks are using swaps for match their asset - liability mismatch.
Interest Rate Swaps - A bank having a fixed income and floating outflow can go in for a swap
to get fixed outflow. Similarly, swaps can be arranged to hedge currency risks. Universal
banking system is now spreading fast. This is diversifying the bank's operational risk.
FORWARD CONTRACTS: A DETAILED STUDY
FEATURES:
Forward exchange contract is a device which can afford adequate protection to an
importer or an exporter against exchange risk. Under a Forward exchange contract a banker and
a customer or another banker enter into contract to buy or sell a fixed amount of foreign currency
on a specified future date at a predetermined rate of exchange. Our exporter, for instance,
instead of examining in the dark or making a wild guess about what the future rate would be, he
enters into a contract with his banker immediately. He agrees to sell foreign exchange of
specified amount and currency at a specified future date. The banker on his part agrees to buy
this at a specified rate of exchange. The exporter thus assures of his price in the local currency.
DATE OF DELIVERY:
According to rule 7 of FEDAI, a ‘Forward contract’ is a deliverable at a future date,
duration of the contract being computed from the spot value date of the transaction. Thus, if a 2
months Forward contract is booked on 12th February, the period of two months should
commence from 14th February and the Forward contract will fall due on 14th April.
CLASSIFICATION OF FORWARD CONTRACT
The Forward contracts may be classified based on their nature and the time the amount is
received. Based on their nature, Forward contracts may be of two types – Forward sale contract
and Forward purchase contract. Based on the time the amount is delivered, they may be
classified as fixed and Option Forward contracts.
Forward sale contract:
Forward sale contract is a method for hedging the exchange risk that involves an
agreement between a banker and an importer to sell particular currency at a specified rate and a
future time.
Forward purchase contract:
Forward purchase contract is a method for hedging the exchange risk that involves an
agreement between a banker and an importer to sell particular currency at a specified rate and a
future time.
Fixed and Option Forward contract:
The Forward contract under which the delivery of foreign exchange should take place on
a specified future date is known as ‘Fixed Forward Contract’
An arrangement whereby the customer can sell or buy from the bank foreign exchange on
any day during a given period of time at a predetermined rate of exchange is known as ‘Option
Forward Contract’.
HEDGING WITH FORWARD CONTRACTS:
Forward contract is the traditional method by which exporters and importers were
hedging their foreign currency exposures. It affords perfect hedge for foreign currency
exposures but it also takes away the opportunity to make profits from favorable movements in
exchange rate.
This uncertainty about the rate that would prevail on a future date is known as ‘exchange
risk’. For the exporter the exchange risk is that the foreign currency in which the transaction is
designated may depreciate in future and may bring less than expected realization in local
currency terms
The importer faces exchange risk when the transaction is designated in a foreign
currency. The risk is that the foreign currency may appreciate in value and he may be compelled
to pay in local currency an amount higher than that was originally contemplated. Importers
generally make arrangements for loans for payment for the imports. If foreign currency
appreciates subsequent to the arrangement of the loan, the importer may find that the resources
are not sufficient to meet the importer bill putting him in a difficult situation.
BOOKING OF FORWARD CONTRACT:
Forward contracts can be booked by paying a sum of Rs. 500 per contract irrespective to
the amount of the transaction. The regulations relating to booking of Forward contracts are
given below:
The bank, through verification of documentary evidence, should be satisfied about the
genuineness of the underlying exposure.
The maturity of the hedge should not exceed the maturity of the underlying transaction.
The currency of hedge and tenor are left to the choice of the customer.
Where the exact amount of the underlying transaction is not ascertainable, the contract
can be booked on the basis of a reasonable estimate.
Foreign currency loans/bonds will be eligible for hedge only after final approval is
accorded by the Reserve Bank, where such approval is necessary.
In the case of Global Depository Receipts (GDRs), the issue price should have been
finalized.
Substitution of contracts for hedging trade transactions may be permitted by an
authorized dealer on being satisfied with the circumstances under which such substitution
has become necessary.
CANCELLATION AND RE-BOOKING:
The Forward contracts may be cancelled or re-booked. When a Forward contract
is cancelled the customer has to pay an amount of Rs. 1000.
All cross currency Forward contracts (not involving rupee) can be freely re-booked on
cancellation.
All Forward contracts with rupee as one of the currencies, booked to cover foreign
exchange exposure falling due within one year can be freely cancelled and re-booked.
All Forward contracts, involving the rupee as one of the currencies, booked by residents
to hedge current account transaction, regardless of tenor, may be allowed to be cancelled
and rebooked freely. The exposure can again be covered by the customer with the same
or another bank. Banks will have to ensure that a genuine exposure to the extent of the
amount of the Forward contract in respect of a permissible transaction continues to exist.
This relaxation is not applicable to Forward contracts booked on past performance basis
without documents as also Forward contracts booked to hedge transactions denominated
in foreign currency but settled in Indian rupees, where the current restrictions will
continue. Further, the facility of cancellation and rebooking is not permitted unless the
facility of cancellation and rebooking of Forward contracts is extended to these
transactions subject to the condition that total Forward contracts rebooked shall not
exceed the total of the un-hedged exposures falling due within one year (April-March).
For monitoring the limit banks may obtain suitable declaration from the customer about
the contracts rebooked with other banks.
A Forward contract cancelled with one bank can be rebooked with another bank subject
to the following conditions:
(i) The switch is warranted by competitive rates on offer, termination of banking
relationship with the bank with whom the contract was originally booked, etc.;
(ii) The cancellation and rebooking are done simultaneously on the maturity date of the
contract; and
(iii) The responsibility of ensuring that the original contract has been cancelled rests with
the bank who undertakes re-booking of the contract.
3.4 CATEGORISATION OF EXCHANGE RATES:
The exchange rates may be classified into two types- Fixed Exchange Rates, Floating
Exchange Rates and Managed Floating Rates.
3.4.1 FIXED EXCHANGE RATES:
Fixed exchange rates refer to the system under the gold standard where the rate of
exchange tends to stabilize around the mint par value. Any large variation of the rate of
exchange from the mint par value would entail flow of gold into or from the country. This
would have the effect of bringing the exchange rate back to mint par value.
In the present day situation where gold standard no longer exists, fixed rates of exchange
refer to maintenance of external value of the currency at a predetermined level. Whenever the
exchange rate differs from this level it is corrected through official intervention. For example,
when IMF was instituted, every member-country was required to declare the value of the
currency in terms of gold and US Dollars (known as par value). The actual market rates were
allowed to fluctuate only within narrow band of margin from this level.
The par value system was abolished with the second amendment to the Articles of IMF in
1978. Still the system of fixed rates continues in many countries in the form of pegging their
currencies to a major currency. For instance, countries like Egypt and Pakistan have pegged the
value of their currencies to US dollar. That is, the values of these national currencies are fixed in
terms of US dollar and are allowed to vary in the exchange markets only within a narrow band.
3.4.2 FLOATING EXCHANGE RATES:
Free or floating exchange rates refer to the system where the exchange rates are
determined by the conditions of demand for and supply of foreign exchange in the market. The
rates are free to fluctuate according to the changes in demand and supply forces with no
restrictions on buying and selling of foreign currencies in the exchange market.
Under floating rates no par value is declared and the central bank does not intervene in
the market. Any disparity in the balance of payments is adjusted through the changes in
exchange rate that take place automatically in the market. Because the central bank does not
intervene in the market there is no change in the exchange reserves of the country.
3.4.3 MANAGED FLOATING EXCHANGE RATE
Managed floating exchange rate, also known as "dirty" float, this is a system of floating
exchange rates with central bank intervention to reduce currency fluctuations. There is no
currency in the world for which its value is absolutely determined by the foreign exchange
market; in cases of extreme appreciation or depreciation, the (A government monetary authority
that issues currency and regulates the supply of credit and holds the reserves of other banks and
sells new issues of securities for the government) central bank will intervene to stabilize the
currency. Thus, the exchange rate regimes of floating currencies may more technically be known
as a managed float.
3.5 TYPES OF RATES:
SPOT RATES:
A spot exchange rate is a rate at which currencies are being traded for delivery on the
same day. It is the exchange rate for which two parties agree to trade two currencies at the
present moment. The spot exchange rate is usually at or close to the current market rate because
the transaction occurs in real time and not at some point in the future.
FORWARD RATES:
A Forward Foreign Exchange rate is the exchange rate at which one currency can be
exchanged for another currency for settlement on a predetermined future date (maturity date).
3.5.1 CROSS RATES:
A cross rate is often used as a tool in currency trading by investors. The comparison of
the current value of one foreign currency to the value of another foreign currency is considered
as an extremely important indicator for currency trades. This indicator provides investors a
helpful method of tracking the impact of various events on the value of the currencies that are
being traded.
3.6 A STUDY ON THE FOREX OPERATIONS AT INDIAN OVERSEAS BANK
Let us see a detailed framework of the foreign exchange operations at the Indian
Overseas Bank, Puducherry.
3.6.1 NRI ACCOUNTS
Foreign Exchange Management (Deposit) Regulations, 2000 govern the non-resident
deposit accounts in India. Foreign Currency (Non Resident) accounts can be opened by non-
resident Indian and persons of Indian origin. Authorized dealers are permitted under the
regulations to open any of the following types of accounts for non-residents of Indian nationality
or origin.
TYPES OF ACCOUNTS
The Non – residents can either maintain their account in rupee or in foreign currency itself.
They may be distinguished into the following accounts.
1. Rupee Accounts
(i) Ordinary Non- Resident Rupee Account,
(ii) Non –resident (external) Account.
2. Foreign Currency Accounts
(i) Foreign Currency (Non – Resident) Accounts (Banks) Scheme. [FCNR]
RUPEE ACCOUNTS:
The rupee accounts are denominated in rupees.
I NON-RESIDENT ORDINARY RUPEE ACCOUNTS:
A Non-resident ordinary rupee is proposed to facilitate the domestic transactions of the non-
resident Indians. NRI’s and PIO can maintain this account for bonafide local banking
transactions without involving violation in the provisions of FEMA.
Eligibility:
Any person who resident outside India (other than of Bangladesh and Pakistan
nationality) may open NRO account with an authorized dealer.
When a resident of India leaves to another country (other than Nepal or Bhutan) for
taking up employment or carrying on his business outside India for an uncertain period,
his existing account should be changed as non-resident (ordinary) account.
Types of accounts:
NRO accounts may be opened and maintained in the form of current, savings, recurring
or fixed deposit accounts.
II NON- RESIDENT (EXTERNAL) ACCOUNTS:
The non-resident (external) accounts are the accounts maintained with the authorized
dealers in the names of person’s resident outside India in pursuance of the Non- Resident
(external) rupee Account Scheme.
Benefits:
NRE accounts are designed to provide some special benefits that are not available in the
NRO accounts. The main benefits are as follows:
Interest earned on the account is exempt from Income Tax
Balances held in the account are exempt from Wealth Tax.
The balance in the account, including interest is repatriable abroad without reference to
the Reserve Bank of India.
Eligibility:
Any person who resident outside India (other than of Bangladesh and Pakistan
nationality) may open NRO account with an authorized dealer and with banks authorized
by Reserve Bank of India to maintain such accounts.
The account should be opened by the Non-resident himself and not by the holder of the
power of attorney.
Types of accounts:
NRE accounts may be opened and maintained in the form of current, savings, recurring
or fixed deposit accounts.
FOREIGN CURRENCY ACCOUNTS:
This account is maintained in foreign currency.
I FOREIGN CURRENCY (NON – RESIDENT) ACCOUNTS
Foreign Currency (Non Resident) (FCNR) accounts can be opened by non-resident
Indian and persons of Indian origin. FCNR Account was introduced in 1975 to protect the
depositors from the exchange risk and assure the repayment of the expected amount in foreign
currency. The exchange risk under this scheme will be borne by Reserve Bank of India. The
deposits received by banks were sold to Reserve Bank at notional rates. Repayment of deposits
and periodical payment of interest was made to depositors by banks by purchasing from reserve
bank the requisite foreign exchange at the same notional rate.
Foreign Currency (Non Resident) (FCNR) accounts (Banks) Scheme [FCNR-B] was
introduced in May 1993 to shift he exchange risk from Reserve Bank to Commercial Banks. It
was effective from 15th August 1994. From 1994 onwards, the deposits were accepted under the
FCNR-B scheme only.
Eligibility:
Any person who resident outside India (other than of Bangladesh and Pakistan
nationality) may open NRO account with an authorized dealer.
Accounts may be opened with funds remitted from outside India or by transfer of funds
from existing NRE/FCNR accounts.
Types of accounts:
These accounts may be opened only in the form of term deposit for any of the five
maturity periods.
Recurring deposits are not permitted under this scheme.
Designated currencies:
Deposit of funds under this account may be accepted in Pound Sterling, US Dollar, Euro,
Japanese Yen, Australian Dollar and Canadian Dollar.
If the remittance is received other than the designated currency, it should be converted
into the latter currency by the authorized dealer at the expense of the account holder and
credit it only in the designated currency.
II RESIDENT FOREIGN CURRENCY ACCOUNTS
These are the accounts denominated in foreign currency by the residents of India. The
Foreign Exchange Management Regulations, 2000 provides for opening of the following three
types of accounts by residents:
1. Exchange Earners Foreign Currency Account
2. Resident Foreign Currency Account
3. Resident Foreign Currency (domestic) Account
EXCHANGE EARNERS FOREIGN CURRENCY ACCOUNT [EEFC]:
Exporters of goods and services and the beneficiaries of inward remittances can retain up
to 100% of such remittances in foreign currency itself in an EEFC Account. Amounts received
in foreign exchange by domestic units for supplies to Export oriented units are also eligible as
foreign exchange received.
Eligibility:
All the residents of India who are beneficiaries of inward remittances and exporters of
goods and services are eligible to open an EEFC account.
Types of accounts:
Banks cans maintain EEFC accounts in any convertible currency.
The account can be maintained as non-interest bearing current account.
Exporters are permitted to maintain outstanding balance up to USD 1 million in the form
of term deposits up to one year maturity.
RESIDENT FOREIGN CURRENCY ACCOUNT:
A Resident Foreign Currency account in India can be maintained by a Non-resident
Indian who has returned home for permanent settlement, after staying abroad for a minimum
period of one year. It was introduced in the year 1992 to help the returning Indians to retain their
legitimate earnings in foreign currency.
Eligibility:
A person resident in India may open, hold and maintain a RFC account in foreign
currency with any authorized dealer in India.
Types of accounts:
The account can be held in the form of current, savings or term deposit in the case where
the account holder is an individual
The account can be held in the form of current or term deposit in all the other cases.
It can be held singly or jointly in the name of person eligible to open this account.
RESIDENT FOREIGN CURRENCY (DOMESTIC) ACCOUNT:
Resident Foreign Currency (domestic) Account was introduced in the year 2002. It is
seen as a move towards making rupee fully convertible on capital account. This account will be
maintained in the form of current account and shall not bear any interest. Cheque facility is
available. There will be no ceiling on the balances held in the account.
Eligibility:
A resident individual can open and maintain this account with an authorized dealer an
account in foreign currency provided that such foreign exchange in the form of currency
notes, bank notes and travelers cheques was acquired by him;
(a) While on a visit to any place outside India by way of payment for services not arising
from any business in or anything done in India; or
(b) From any person not resident in India and who is on a visit to India, as honorarium or
gift or for any services rendered or in settlement of any lawful obligation; or
(c) By way of honorarium or gift while on a visit to any place outside India; or
(d) Earlier from an authorized person for travel abroad and remains unspent.
3.7 PRE-SHIPMENT CREDIT:
A Pre-Shipment credit otherwise known as packing credit is any loan or advance granted
to an exporter for fnancing the purchase, processing, manufacturing or packing of goods meant
for export or working capital expenses rendered towards rendering of sercies abroad. In other
words, it is the facility extended to the exporters before and till the goods are shipped for exports.
Eligibility:
A Pre-shipement credit will be granted to exports based on their request if they have the
following documents.
The letter of credit established by the banks of standing abroad in favour of the exporters.
It can also be granted on the strength of an export order.
Type of Account:
Packing credit will be given in the form of loan
The Pre-shipement loan will be available for a maximum of 180 days on a concessional
rate.
The concessional rate will be withdrawn for the nest 180 days.
The amount advanced towards the packing credit should not exceed 75% of the FOB,
CIF or CFR amount.
That 75% of amount will be calculated at the notional rate given by the RBI.
Repayment:
The packing credit account should be repaid out of the
Proceeds of foreign bills of exchange drawn under the export contract.
Export incentives like duty drawback
Can also be paid out of the balances of the EEFC account (subject to mutual agreement
between the exporter and the bank)
3.8 POST-SHIPMENT FINANCE:
A Post-Shipment finance is a credit facility extended to the exporters from the time goods are
shipped and till the export proceeds are realised. Post-Shipment finance may take any of the
following forms:
Negotiation of a bill drawn under a letter of credit
Purchase of a bill drawn under a letter of credit
Advance against bill sent for collection
Advance against duty drawback.
POST-SHIPMENT FINANCE IN FOREIGN CURRENCY:
Post-Shipment finance in foreign currency can be made available through
Use of on-shore foreign currency funds
Banks raising foreign currency funds abroad
Exporters raising foreign currency funds abroad
Interest is charged at non exceeding LIBOR plus 1% for period up to 90 days.
CHAPTER 4
ANALYSIS AND INTERPRETATION
Based on the information collected using through the telephonic interview as well as the
secondary data from different sources, we can segregate the problems with regard to the Forward
contracts, NRE accounts, inflow and outflow of the currencies and their impact on the Risk
Management of the customers of the Bank. Each one are addressed separately and the analysis is
carried out.
4.1 Forward Contracts as a risk mitigation tool:
It is a feature that can be utilized by Indian residents who engage in exports and imports
of goods as well as other transactions that involves them to deal with the foreign currency. This
enables them to be aware of the exchange risks involved in their transactions. Any person who
get some amount in the form of foreign currency for their export transactions or any other
remittances can enter into a Forward contract. It is simply hedging their risk so that they need
not gamble with the future events.
A quick example would help to illustrate the mechanics of a cash settled Forward
contract done in the foreign exchange branch. Let us assume that the exchange rate is USD 1 =
Rs. 45. On January 1, 2009 National Sewing Thread Co. Ltd., agrees to buy from James
Chadwick & Bros. Ltd., 1000 yarns of cotton on April 1, 2009 at a price of $ 30.00 per yarn
(Total Value is USD 30000 i.e Rs.13,50,000 in terms of Indian currency on the day which the
transaction is entered). Here the National Sewing Thread Co. Ltd. has to pay Rs. 13,50,000 to
James Chadwick & Bros. Ltd., on April 1, 2009. If on April 1, 2009 the spot price (also known
as the market price) USD 1 = Rs. 44, the National Sewing Thread Co. Ltd., will incur loss. They
will get only an amount of Rs.13,20,000. The remaining amount of Rs.30000 is a loss for them.
Therefore, in order to cover this risk aroused due to exchange rate fluctuation the company can
enter into a Forward contract with the bank.
The company can enter into the Forward contract when they are sure of getting a
particular amount on a particular date. This contract helps them to be on the safer side and they
are assured of that particular amount on which they have entered into.
There of two type of Forward contracts- (i) Forward Purchase contract and Forward Sale
contract. The term purchase and sale are used with respect to the banker. In a Forward purchase
contract the banker agrees to purchase a certain amount of foreign currency from the exporter.
Here the exporter hedges his risk. In a Forward sale contract the banker agrees to sell a certain
amount of foreign currency to the importer. Under this case the importer hedges the risk.
When we analyze a Forward contract and find the difference between the forward rate
(the rate at which the agreement is entered into) and the real exchange rate or the spot rate, the
contracts would end up at a Premium or Discount.
Forward contracts ended in Premium:
In case of a Forward purchase contract, if the forward rate is more than the spot rate and
in case of a Forward sale contract, if the spot rate is more than the forward rate then the contract
results in a Premium.
Forward contracts ended at Discount:
In case of a Forward purchase contract, if the spot rate is more than the forward rate and
in case of a Forward sale contract, if the forward rate is more than the spot rate the contract ends
at a Discount.
By taking this as the base, we can analyze the total number of contracts that have been
ended in Premium as well as Discount. This can give us a clear insight as how the Forward
contract works.
Analysis of Forward Premium and Forward Discount contracts: For the study period
[2006-2010]
The following table tells us about the number of contracts that have been resulted in
Premium as well as discount.
Table 4.1: Forward contracts resulting in Premium and Discount:
Sl. No. Category No. of contracts Result in %
1. No of contracts ended in Premium 148 62
2. No of contracts ended at Discount 104 38
Total no. of Forward Contracts 252
Source : (Forward contract register of Indian Overseas Bank, Pondicherry)
Figure 4.1. Forward contracts resulting in Premium and Discount:
PREMIUM62%
DISCOUNT38%
FORWARD CONTRACTS
Interpretation:
When a person enters into a Forward contract, it doesn’t mean that he has earned any
profit or incurred any loss, it simply tells that the particular contract has ended at a Premium or
Discount against his transaction.
From the Table 4.1 and Figure 4.1, we can come to a conclusion that we can conclude
that 68% of the Forward contracts have ended at a Premium and only 38% have ended at a
Discount. This implies that in the recent years, entering into a Forward contract mostly have
ended at premium.
4.2 ANALYSIS BASED ON THE PERSONAL AND TELEPHONIC INTERVIEW:
This analysis is based on the personal as well as telephonic interview which was done to
the customers of Indian Overseas Bank who engage in the export and import transactions.
Q1. Are you aware of Forward contract?
This question was asked to know the awareness level of Forward contracts to the
customers. The result was as follows.
Table 4.2: Awareness of Forward Contracts
Sl. No. Category No. of respondents Result in %
1. Yes 11 39
2. No 17 61
Total 28 100
Source: (Results computed through telephonic interview)
Figure 4.2: Awareness of Forward Contracts
39 %
61 %
Awareness about forward contract.
YesNo
Interpretation:
The table 4.2 and figure 4.2 shows that very few among the customers are aware of the
Forward contracts. It clearly shows that only 38% of the respondents are aware that there is a
tool named Forward contract for exchange risk. The remaining 68% of the respondents are not
aware about this tool. They don’t use any tools for hedging. They simply gamble on the
exchange rates and most of the time they incur loss due to the exchange rate fluctuations.
Qn. 2 Will you use Forward contracts in future?
This question was asked to know whether the customers would prefer to use Forward
contracts as their hedging tool in order to overcome their exchange rate fluctuation risk.
Table 4.3: Usage of Forward contracts in future
Sl. No. Category No. of respondents Result in %
1. Yes 25 89
2. No 3 11
Total 28 100
Source: (Results computed through telephonic interview)
Figure 4.3: Usage of Forward contracts in future
89 %
11%
Usage of Forward Contracts in future
YesNo
Interpretation:
We made the clients of the bank aware about the Forward contracts. From the table 4.3
and the figure 4.3 we can conclude that all their customers are now aware of the Forward
contracts and most of them will use it in future to reduce their exchange risk. Some customers
were reluctant and told that they will maintain their currencies in EEFC account and this is of no
use to them.
Qn.3 Do you have an EEFC account?
This question was asked to know about the number of customers who have opened an
EEFC account with the Indian Overseas Bank, Pondicherry branch.
Table 4.4: EEFC account holders
Sl. No. Category No. of respondents Result in %
1. Yes 9 32
2. No 19 68
Total 28 100
Source: (Results computed through telephonic interview)
Figure 4.4: EEFC account holders
32 %
68 %
No. of EEFC account holders
YesNo
Interpretation:
From the above table 4.4 and figure 4.4 it is evident that only 32% of the clients own an
EEFC account. The remaining 68% do not have such account. They are bound to face more
exchange risk. These people may use the Forward contract facility to hedge their exchange risk.
Qn. 4 Are you aware of Pre-Shipment and Post-Shipment Credit?
As noted by me there were very few Pre-Shipment and Post-Shipment advances taken by
the customers. This question is asked to know whether the customers are aware of the Pre-
Shipment and Post-Shipment credit advances and whether they are aware and don’t require them.
Table 4.5: Awareness about Pre-Shipment and Post-Shipment Credit
Sl. No. Category No. of respondents Result in %
1. Aware, Will use 5 18
2. Aware, but not required 21 75
3. Not aware 2 7
Total 28 100
Source: (Results computed through telephonic interview)
Figure 4.5: Awareness about Pre-Shipment and Post-Shipment Credit
18%
75%
7%
Awareness about the Pre-shipment and Post-shipment advances
Aware, will useAware, but not requiredNot aware
Interpretation:
Most of the clients are aware of the Pre-Shipment and Post-Shipment advances but their
form of business does not require this facility. From the above Table 4.5 and Figure 4.5 it is
clear that 75% of people are aware of the Pre-Shipment and Post-Shipment advances but they
don’t require such facility. 18% of people are aware and said that they will continue using this
facility. The remaining 7% of people were not aware of this facility and they are ready to use
them in future.
4.3 ANALYSIS BASED ON DAY-TO-DAY FOREX OPERATIONS AT THE
BRANCH:
While taking the day-to-day operations of the bank, we can consider the NRI accounts of
the bank. When I tried to compare the growth of the NRI account I found that the there was a
remarkable decrease in the NRI (Deposits) account whereas there was a steady increase in the
NRI (Savings) account.
COMPARISON BETWEEN NRE (DEPOSITS) AND NRE (SAVINGS):
The following is a comparison between the NRE (Deposits) and NRE (Savings) accounts.
It is done for the period starting from April, 2006 to March, 2010.
Table 4.6 (A): NRE (Deposits)
Deposits as on No. of Accounts Total Balance
(in lakhs)
31.3.2006 136 541.37772
31.3.2007 111 499.67151
31.3.2008 95 379.61077
31.3.2009 81 319.50276
31.3.2010 49 233.48025
Source: (Books of Accounts of Indian Overseas Bank)
Figure 4.6 (A): NRE (Deposits)
2006 2007 2008 2009 20100
100
200
300
400
500
600
NO. OF ACCOUNTSTOTAL BALANCE
Source: (Books of Accounts of Indian Overseas Bank)
The above table 4.6 (A) and figure 4.6 (A) indicates the total number as well as the
volume of NRE (Deposits). From this we could estimate that the number of accounts has been at
a considerable decrease for the study period.
Table 4.6 (B): NRE (Savings)
Deposits as on No. of Accounts Total Balance
(in lakhs)
31.3.2006 536 366.83344
31.3.2007 607 426.63510
31.3.2008 690 460.47516
31.3.2009 758 738.82319
31.3.2010 831 730.73507
Source: (Books of Accounts of Indian Overseas Bank)
Figure 4.6 (B): NRE (Savings)
2006 2007 2008 2009 20100
100
200
300
400
500
600
700
800
900
NO. OF ACCOUNTSTOTAL BALANCE
From the above table 4.6 (B) and figure 4.6 (B) we can identify that there is a steady increase in
the NRE (Savings) account.
Interpretation:
From the above tables [4.6(A) , 4.6(B)] and figures [4.6(A) , 4.6(B)], we can conclude
that there had been a notable decrease in the NRE deposits as well a simultaneous increase in the
NRE savings account. This was due to the interest rate given under both the accounts. The
interest rate given in the NRE deposits accounts has undergone a drastic decrease and that have
resulted the customers to be price conscious and they have started shifting from NRE deposits to
NRE savings account.
4.4 EXIM RATIO:
In this study we have introduced EXIM ratio as an indicator for analyzing the
supportiveness of exports to its imports. In simple words, we have attempted to analyze whether
the imports are supported by the exports.
This ratio brings out the relationship between the value of exports and the value of
imports. By calculating this ratio, we can determine whether the bank’s inflow of currency can
withstand the outflow of the same. It can be calculated using the following formula.
EXIM ratio = Value of Export/Value of Import
Working of the EXIM ratio:
In order to calculate this ratio, we have to know the total value of exports as well as the
total value of imports. Here, this ratio is applied for every year during the study period, i.e for a
period of 4 years starting from April 2006 to March 2010.
The first step undertaken was to consolidate the total value of exports and the total value
of imports for every year.
Since the bank deals with several currencies it is difficult to find this ratio for all the
currencies. Hence, all the currencies are converted into the value of US Dollars using
cross rates taking Indian Rupees as the base currency.
After finding the value of exports and the value of imports, we can use this formula and
find the relationship between them.
This ratio gives us an idea whether the bank can generate the outflow of the currency
through its inflow. If the ratio is more than 1, it implies that the value of exports is more than
that of the value of imports i.e the bank has enough back up to pay for its import proceeds. If
the ratio is less than 1 it implies that the value of imports is more than the value of exports i.e the
bank cannot support its import proceeds. They have to find an alternative way for this situation.
Steps for using EXIM Ratio:
STEP 1: Consolidation of the value of imports and the value of exports.
Table 4.7 (A): Value of Exports
YEAR/
CURRENCY
USD EURO CHF GBP CAD AUD JPY
Apr 06 – Mar 07 1128720 263444.2 28783 17494.03 nil nil 486114
Apr 07 - Mar 08 1207908 202589.6 50197.8 5247.3 1888.17 nil
Apr 08 – Mar 09 7276421 213781.3 97809 17728.48 1121.15 nil 52531306
Apr 09 – Mar 10 3178527 3638718 105390.9 72437.34 166.5 nil 6573036
Source: (Computed results from Foreign Exchange Register of Indian Overseas Bank)
Table 4.7 (B): Value if imports
YEAR/
CURRENCY
USD EURO CHF GBP CA
D
AUD JPY
Apr 06 – Mar 07 1986780 72513.52 nil nil nil nil Nil
Apr 07 - Mar 08 2212371 154374 49909.15 2798.5 nil nil Nil
Apr 08 – Mar 09 8908881 375832.9 124659 27580 nil 110479.5 1188053
Apr 09 – Mar 10 4013242 99783.55 45904.5 5121.26 nil 51100.5 Nil
Source: (Computed results from Foreign Exchange Register of Indian Overseas Bank)
STEP: 2 Calculating the cross rates.
CROSS RATES:
It is a rate of exchange between a pair of currencies. For example, USD 1 = Rs. 44.40 and
Euro 1 = Rs. 53.43, the cross rate will be calculated as follows:
EURO / USD = 53.43 / 44.40 = 1.20
The answer 1.20 is the cross rate. It can be written as 1 Euro = 1.20 USD.
Tables: * Cross rates for the study period
Table 4.8 (A): Cross rates with respect to TT Buying rates
YEAR/
CURRENCY
EURO CHF GBP CAD AUD JPY
Apr 06 – Mar 07 1.20 0.76 1.73 0.85 0.71 0.84
Apr 07 - Mar 08 1.33 0.82 1.97 0.86 0.81 0.84
Apr 08 – Mar 09 1.56 0.98 1.97 0.97 0.91 0.98
Apr 09 – Mar 10 1.32 0.87 1.44 0.79 0.70 1.01
Source: (Computed rates from the website of Indian Overseas Bank)
Table 4.8 (B): Cross rates with respect to TT Selling rates
YEAR/
CURRENCY
EURO CHF GBP CAD AUD JPY
Apr 06 – Mar 07 1.21 0.77 1.74 0.86 0.72 0.85
Apr 07 - Mar 08 1.34 0.81 1.98 0.87 0.81 0.85
Apr 08 – Mar 09 1.56 0.99 1.98 0.98 0.91 0.99
Apr 09 – Mar 10 1.33 0.88 0.45 0.80 0.70 1.02
Source: (Computed rates from the website of Indian Overseas Bank)
* The above mentioned cross rates are calculated based on the average exchange rate
provided by the bank.
STEP: 3 Conversion of the consolidated value of currencies in terms of USD using cross
rates.
Conversion to USD:
The value of the imports and exports can be converted by multiplying the consolidated
value of currencies and the respective cross rates. For example, the cross rate for the period
April 2006 to Mar 2007 is 1.20 and the consolidated value of exports in terms of Euro for the
same period is 263444.2. So this can be termed as (1.20 * 263444.2) USD 318767.482. Thus
we can convert all the currencies in terms of USD.
In order to bring uniformity to the value of export and the value of import in terms of
currencies, all the currencies other than that of USD were converted to USD using cross rates.
NOTE: The value of exports in terms of USD is the product of the TT buying rates and
the consolidated export values. Similarly the value of imports in terms of USD is the product of
the TT selling rates and the consolidated import values.
STEP: 4 Finally, we can bring out a relationship between the value of exports and
imports with the usage of EXIM ratio.
ANALYSIS USING EXIM RATIO:
I For the year April 2006 – March 2007
Table 4.9 (A): Value of exports
CURRENCY USD EUR CHF GBP CAD AUD JPY
AMOUNT 1986780 72513.52 NIL NIL NIL NIL NIL
CROSS RATE 1 1.2 NIL NIL NIL NIL NIL
AMT IN USD 1986780 87016.22 NIL NIL NIL NIL NIL
GRAND TOT 2073796Source: (Results computed using cross rates)
Table 4.9 (B): Value of imports
CURRENCY USD EUR CHF GBP CAD AUD JPY
AMOUNT 1128720 263444.2 28783 17494.03 NIL NIL 486114
CROSS RATE 1 1.21 0.77 1.77 NIL NIL 0.85
AMT IN USD 1128720 318767.482 22162.91 30964.43 413196.9
GRAND TOT 1913811.725
Source: (Results computed using cross rates)
EXIM ratio = Value of exports / Value of Imports
= 2073796 / 1913811.725
= 1.08
Interpretation:
The above ratio implies that the value of exports is 1.08 times greater than that of the
value of imports. Thus, from the above ratio, we can understand that the bank has a perfect
reserve of the inflow of currencies to meet its outflow for that corresponding year.
II For the year April 2007 – March 2008
Table 4.10 (A): Value of exports
CURRENCY USD EUR CHF GBP CAD AUD JPY
AMOUNT 2212371 154374 49909.15 2798.5 NIL NIL NIL
CROSS RATE 1 1.33 0.82 1.97 NIL NIL NIL
AMT IN USD 2212371 205317.4 40925.5 NIL NIL NIL NIL
GRAND TOT(IN USD)
2464127
Source: (Results computed using cross rates)
Table 4.10(B): Value of imports
CURRENCY USD EUR CHF GBP CAD AUD JPY
AMOUNT 1207908 202589.6 50197.8 5247.3 1888.17 NIL NIL
CROSS RATE 1 1.34 0.81 1.98 0.87 NIL NIL
AMT IN USD 1207908 271470.064 40660.22
10389.65 1642.708 NIL NIL
GRAND TOT(IN USD)
1532070.644
Source: (Results computed using cross rates)
EXIM ratio = Value of exports / Value of Imports
= 2464127 / 1532070.644
= 1.61
Interpretation:
The above ratio implies that the value of exports is 1.61 times greater than that of the
value of imports. Thus, from the above ratio, we can understand that the bank has more reserve
of the inflow of currencies to meet its outflow for that corresponding year.
III For the year April 2008 – March 2009
Table 4.11 (A): Value of exports
CURRENCY USD EUR CHF GBP CAD AUD JPY
AMOUNT 8908881 375832.9 124659 27580 NIL 110479.5
1188053
CROSS RATE 1 1.56 0.98 1.97 NIL 0.91 0.98
AMT IN USD 8908881 NIL NIL NIL NIL NIL
GRAND TOT(IN USD)
10936507.03
Source: (Results computed using cross rates)
Table 4.11 (B): Value of imports
CURRENCY USD EUR CHF GBP CAD AUD JPY
AMOUNT 7276421 213781.3 97809 17728.48 1121.1 NIL 52531306
CROSS RATE 1 1.56 0.99 1.98 0.98 NIL 0.99
AMT IN USD 7276421 333498.828 96830.91 35102.39 1098.7 52005993
GRAND TOT(IN USD)
59748944.8
Source: (Results computed using cross rates)
EXIM ratio = Value of exports / Value of Imports
= 10936507 / 597489944.8
= 0.18
Interpretation:
The above ratio implies that the value of imports is 0.18 times greater than that of the
value of imports. Thus, from the above ratio, we can understand that the bank could not
withstand the imports through their exports. Therefore, they have to go for some other option
like they have to adjust their reserves with the NRI remittances or they have to go to interbank
market to match their currencies.
IV For the year April 2009 – March 2010
Table 4.12 (A): Value of exports
CURRENCY USD EUR CHF GBP CAD AUD JPY
AMOUNT 4013242 99783.55 45904.5 5121.26 NIL 51100.5 NIL
CROSS RATE 1 1.32 0.87 1.44 NIL 0.7 NIL
AMT IN USD 4013242 131714.3 39936.92
7374.614 NIL 35770.35
NIL
GRAND TOT(IN USD)
4228038
Source: (Results computed using cross rates)
Table 4.12 (B): Value of imports
CURRENCY USD EUR CHF GBP CAD AUD JPY
AMOUNT 3178527 3638718 105390.9 72437.34 166.5 NIL 6573036
CROSS RATE 1 1.33 0.88 0.45 0.8 NIL 1.02
AMT IN USD 3178527 4839494.94 92743.99 32596.8 133.2 6704497
GRAND TOT(IN USD)
14847992.66
Source: (Results computed using cross rates)
EXIM ratio = Value of exports / Value of Imports
= 4228038 / 14847992.66
= 0.03
Interpretation:
The above ratio implies that the value of imports is 0.03 times greater than that of the
value of imports. Thus, from the above ratio, we can understand that the bank could not
withstand the imports through their exports.
CHAPTER 5
SUMMARY OF FINDINGS, SUGGESTIONS AND CONCLUSION
5.1.1 GENERAL FINDINGS:
There are lots of risks due to exchange rate fluctuations. The banking industry in India
has many instruments to mitigate this risk.
It is noted that customers are cost conscious. Most of the Forward purchase contracts are
entered as the option Forward contracts and the Forward sale contracts are entered into
fixed Forward contracts. This implies that when the customer has to export goods he
goes for an option Forward contract and when he imports he goes for a Forward sale
contract.
5.1.2 SPECIFIC FINDINGS:
Figure 4.1 indicates that the Forward Premium contracts are more in number than the
Forward Discount contracts. This is the situation in the Indian Overseas Bank for the
study period.
Figure 4.2 explains that only 39% of the customers are aware about the Forward contracts
and the remaining don’t know that there are tools for hedging their risk. 89% of the
customers were willing to enter into these Forward contracts in future. While the
remaining tells that they have EEFC account and these Forward contracts were of no use
to them and will not use them. This is shown in Figure 4.3.
Figure 4.4 shows us that 68% are EEFC account holders. This implies that many of
customers are doing regular transactions in imports and exports. They convert the
foreign currency into Indian Rupees whenever they feel that the rate is better.
It was found that the Pre-Shipment and the Post-Shipment advances taken by the
customers were very few in number. Most of them are aware of this facility given by
banks but they feel that their business does not require them. As shown in figure 4.5,
93% of the customers are aware of these advances but only 18% use this facility. 75% of
the customers tell that they don’t require this facility. The remaining 7% are not aware
about this facility.
The NRE Deposits are in a declining trend due to the increase in the rate of interest. This
has made the customers to shift from NRE deposits to NRE savings. The table 4.6 (A)
and 4.6 (B) explains us how the number of accounts has shown a remarkable decrease in
NRE Deposits and a steady growth in the NRE savings account clearly indicating that a
shift has taken place in recent years.
By using the EXIM ratio, it is found that for the year April 2006 - March 2007 the ratio is
1.08 which indicates that the banks was in a stable position pertaining to the forex
reserves. In the year April 2007 - March 2008 the ratio is 1.61 which signifies that the
bank was having reserves that were more than necessary. With reference to the year
April 2008 - March 2009 the ratio is 0.18, which had a sweeping decrease in the inflow
of currencies. In the year April 2009 - March 2010 the ratio is 0.03 which shows a
drastic decrease in the inflow of the currencies.
5.2 SUGGESTIONS:
While we consider Forward contracts, we would like to suggest the customers of Indian
Overseas bank to enter into Forward contracts for their transactions to hedge their risk.
Even if they have any chance of the contract ending at a huge difference they can go for
cancellation of the contract.
The bank need not worry about the cancellation of Forward contracts because they obtain
cancellation charges. But they should be careful that the customers do not use these
Forward contracts for speculation purposes.
Even if a customer is an EEFC account holder they can enter into Forward contracts
because sometimes there is a chance that they may never get a good rate in future.
The customers can also see which currency gives them a better rate with the help of
calculating Cross rates and enter Forward contracts in that currency.
When we compare the NRE deposits and NRE savings account the bank can advice their
customers to move to NRE savings so that they get a better returns. Thus they can have a
good relationship to their customers.
While coming to EXIM ratio, we would like to advise the bank to enter into inter-bank
Forward contracts so that their FOREX reserves are at a stable position.
5.4. CONCLUSION:
The advent of Globalization has witnessed a rapid rise in the quantum of cross border
flows involving different currencies, posing challenges of shift from low-risk to high-risk
operations in foreign exchange transactions. This Study explains that very few customers of the
bank are aware of the derivatives and are using them. The non-users of derivatives have fear of
High Costs of as reasons for not using them. Even the users of derivatives have concerns arising
from using them. Many of the customers do not have adequate knowledge of the use of
derivatives. Hedging is always done only with the Forward contracts. In most cases, Banks
provide the necessary expertise and advice. The Exchange Risk Management practices in India
are evolving at a slow pace. To conclude, it is identified that there is need for a greater sense of
urgency in developing foreign exchange market fully and using the hedging instruments
effectively.