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CHAPTER I

INTRODUCTION TO

INTERNATIONAL BANKING

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INTERNATIONAL

BANKING

Introduction

Banks are the key players in the financial system of a country. They performthe function of financial intermediation in an effective manner. Lately,internationalization or globalization of banks is being witnessed across theglobe. Banks in many nations have internationalized their operations since1970. The quantum of operations has increased in such a manner that theconcept evolved into a subject in itself. International banking and

multinational banking can be used interchangeably. Multinational bankingsignifies the presence of banking facilities in more than one country.According to Aiber, “international banking” is defined as a sub-set of commercial banking transactions and activity having a cross-border and or cross- currency element. International banking comprises a range of transactions that can be distinguished from purely domestic operations by;

i. The currency of denomination of the transaction,ii. The residence of the bank customer, andiii. The location of the banking office.

A deposit or a loan transacted in local currency between a bank in itshome country and a resident of that same country is termed as puredomestic banking. Thus, the term international banking is used to refer tothe cross-currency facets of banking business.

Euro-currency market is an example of a typical international bankingcommunity. The euro-currency market conventionally encompasses alldeposit and loan operations of a bank transacted in a currency other than that

of the nation where the office is located. Euro-currency banking involvesintermediation in foreign currencies and the relative freedom from localreserve requirements and monetary regulation.

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REASONS FOR THE GROWTH OF INTERNATIONAL

BANKING

There are a number of explanations or theories provided to support thegrowth in international banking operations. International banking theoriesexplain the reasons behind the bank’s choice of a particular location for their banking facilities, maintaining a particular organizational structure,and the underlying causes of international banking. Certaintheories/ explanations are listed below:

1) “Follow-the-leader” explanation suggests that banks expand acrossnational borders to continue to serve customers by establishing

branches or subsidiaries abroad. This is mostly done in the context of monopolistic competition, so that they can take advantage of thedifferentiation of their services package from those provided by different

banks.

2) Expansion abroad has a pervasive effect on competition. Many a time banks operating under intense competition in the home markets are

forced to develop low cost technologies for financial intermediationwithout proper incentives; therefore they try to exploit their competitiveadvantage in other markets.

3) An explanation drawn from the analysis of foreign direct investment proposed that banks use management technology and marketing know-howdeveloped for domestic uses at very marginal cost abroad.

4) “Electic Theory of Production” says that banks can take the ownership-specific and location-specific advantages while operating abroad.

5) Market imperfections due to domestic rules, regulation and taxation alongwith the drastic reduction in the cost of communications prompt the banks toset-up operations abroad.

6) Intercountry differences in the cost of capital attract banks to set-up their operations in different countries.

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7) Phillip Callier in his research paper “Professional Trading, Exchange RateRisk and the Growth of International Banking” has put forth that the

establishment of money market and foreign exchange operations in major trading centers throughout the world are helping the banks (operatinginternationally) to significantly reduce the risk of these operations or increase their return without increasing their risk.

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ORGANIZATIONAL FEATURES OF INTERNATIONAL

BANKING

International banks are organized in various formal and informal ways fromsimply holding account with each other to holding common ownership.Given below are some forms of banking organizations that exist across theworld.

Correspondent Banking

This represents an informal linkage between banks and its customers indifferent countries. The term ‘correspondent’ is derived from the mail or cable communications that the banks use for setting customer accounts. Thelinkage is set-up when banks maintain correspondent accounts with eachother. Many a time large banks have correspondent relationships with banksin almost every country in which they do not have an office of their own.This informal linkage facilitates international payments and collections for customers. It allows banks to relieve their customers from maintaining any

personnel or offices overseas. This not only helps in settling customer payments, but also extends* limited credit for each other’s customers for establishing contacts between local business people and the clients of thecorrespondent banks.

Resident Representatives

Often banks open overseas business offices in order to help their customers inforeign countries. These banking offices do not accept local deposits or

provide loans. The main objective of these offices is to provide informationabout local business practices and conditions, including the creditworthinessof potential customers and the banks’ clients. The resident representativesusually keep in touch with the local correspondent banks and provide helpwhen needed.

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Bank Agencies

An agency is similar to a bank except that it does not handle ordinary retaildeposits. The agencies mostly deal in the local currency markets and in theforeign exchange markets, arrange loans, clear bank drafts and cheques,and channel foreign funds into financial markets. They also arrange long-term loans for customers and act on behalf of the home office to keep itdirectly involved in important foreign financial markets.

Foreign Branches

These are operating banks, except that the directors and owners tend toreside elsewhere. These are subject to both local banking rules and the rulesat home. The books of a foreign branch are incorporated with those of the

parent bank, although the foreign branch will also maintain separate booksfor revealing separate performance, and for tax purposes, etc. The existenceof foreign branches provides faster service to customers in differentcountries by offering great advantage over the lengthy clearing process thatcan occur via correspondents. These branches, most of the times, offer

quality services and safety that are provided by a large bank to customers insmall countries.

Foreign Subsidiaries and Affiliates

A foreign branch is part of a parent organization, which is incorporated ina different country, whereas a foreign subsidiary is a locally incorporated

bank that is owned either completely or partially by a foreign parent. Foreignsubsidiaries do all types of banking, and it may be very difficult todistinguish them from an ordinary locally owned bank. Foreign affiliates aresimilar to subsidiaries locally incorporated but they are joint ventures, andno individual foreign owner has control. For instance, if the State Bank of India (SBI) opens one of its branches in Japan, it is a foreign branch where asif a bank located in Japan and SBI plan to work together, then, the bank inJapan is the foreign subsidiary of SBI.

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Consortium Banks

They are joint ventures of the larger commercial banks. They often involvesix or more partners from different countries. They are mainly concernedwith investment, and they arrange large loans and underwrite stocks and

bonds. They do not accept deposits, and they deal with only largecorporations. They take equity positions and they arrange takeovers andmergers.

INTERNATIONAL INTERBANK BUSINESS

Interbank market is the mainstay of the international banking market. Nearlysixty to seventy percent of all international banking market comes from other

banks. The large interbank market makes the market look essentially awholesale market for banks. It enables banks to fund rapidly growing loan

portfolios. The international interbank business either takes the form of adeposit or a loan. The existence of the foreign exchange market (which deals

in currencies) has enhanced the operating efficiency of the interbank market.The nuances of the foreign exchange market are covered in detail in thechapter “The Foreign Exchange Market”.

Functions of Interbank Market;

Linkages of regions and interest rates.Liquidity and risk management.

Breaking up of maturity transformation.Spreading risks among different institutions.

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INTERNATIONAL PRIVATE BANKING

Today the banking industry throughout the world is facing an unprecedentedcompetition. The competition is forcing the banking institutions into areappraisal of the existing clientele base and an attempt to penetrate intonewer markets. The domestic home-protected banks no more enjoymonopoly. ‘A number of private banks has entered the fray in many countriesand are continuously striving to differentiate themselves from others. These

private banks are entering the international scene and are creating a lot of competition in the banking system. Thus evolved the concept of international private banking.

International private banking is counseling service for different people.Basically, the services offered by banks internationally focus either on theasset or liability side of the balance sheet or on a combination of both.Lately, international private banking is becoming an integral part of the

banking system across the world to cater to the needs of high net worth people.

International private banking consists of banking services primarily providedfor non-residents. It differs in the priorities given to the clients. Safety and

secrecy are given the highest priority. Clients keen on maintaining andincreasing their wealth in an environment safe from the potential scrutiny of third parties, added with a confidence are attracted to these banks. Investmentoptions for the clients include:

i. Equity Portfolio Management,ii. Fixed Income Portfolio,iii. Balanced Portfolio,iv. Offshore Mutual Fund, and

v. Short-term Portfolio Management.

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CHAPTER II

INTERNATIONAL BANKING

REGULATORY FRAMEWORK

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REGULATION, DEREGULATION, RE-REGULATION

(INTERNATIONAL MONETARY SYSTEM)

The international banking system is underlined by procedures, customs,instruments and organizational setting that provide a workable multilateral payment arrangement among different countries.

The evolution of international monetary system from the Gold Standard tothe Louvre Accord had a profound impact on the international bankingdevelopments.

NEED FOR REGULATION OF INTERNATIONAL

BANKING

There are varied reasons for regulating international banking. The followingare the basic reasons:

1) The volume of financial flows is much higher than the trade flows.

2) In virtually all developed markets, banking industry is heavily regulatedthan any other commercial or industrial sector. The prudential rationale,

which is the backbone of bank regulation, is heavily dependent on themonetary rationale.

3) Banks are inherently unstable owing to their intermediary function, because it implies a high gearing, or ratio of debt to equity capital. In theearly stages of banking, lending and depository functions were largelyseparated. But subsequently, the fusion of these two functions led to thereduction in capital adequacy ratios of banks across the world. Therefore,common norms on the capital adequacy for banks worldwide becameimperative.

4) The widespread branch network of banks exposes them towidespread withdrawal of funds by depositors. Owing to their high financialleverage banks can be described as ‘conditionally’ solvent, the condition

being that depositors do not collectively exercise their contractual right of withdrawal and thereby forcing the banks into insolvency. This may resultin a solvency problem, as the victim bank tries to unload essentiallyunmarketable assets.

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THE PROCESS OF REGULATION

The actual process of regulation started on 5th July, 1991 under the aegis of the Bank of England (BOE) with the closure of the Bank of Credit andCommerce International (BCCI) and its subsidiaries. Coordinated action wastaken by the BOE in 60 countries to close down the activities of BCCI aswell its subsidiaries in different countries. The effect of the closure of this

bank brought a sea change in the domestic supervisory practices of overseas banks. The following rules were devised.

Host countries should have the following in place:

1) The Central Bank of the country should extend on-site supervision.

2) The Central Bank should devote more resources to search for fraud, if any.

3) A duty has to be imposed on auditors to report suspicions of fraud or malpractice of the bank.

4) Overseas banks are subject to a full-scope review by reporting accountantson an annual basis.

5) Minimum criteria for authorization should be strictly interpreted.

6) The Central Bank would have the explicit power to refuse or revokeauthorization on the grounds that the applicant or bank cannot be effectivelysupervised because of the group’s structure.

7) Cooperation and coordination between the banks, and other non-regulatory bodies should be enhanced.

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REGULATORY ARBITRAGE: BIRTH OF OFFSHORE

BANKING

The gaps that arise either deliberately or unintentionally as a result of regulations, give rise to arbitrage opportunities in banking. Twodevelopments have taken place under this –

Euro-currency markets andOffshore banking units.

EURO-CURRENCY MARKETS

Euro-currency markets came into existence in the early 1950s when theSoviet Union allegedly fearing that the United States might block its dollar reserves, decided to deposit its dollars in a Soviet owned Paris bank, BanqueCommerciale Pour. They evolved from the concept of euro-dollars (thedollars held with a bank outside USA). Later many other reasons promptedthe growth of euro-currency markets.

Broadly, the market comprises three segments:

i. The banks accept deposits mostly on short-term basis.ii. Lend funds for medium and long-term loans.iii. Raise funds on behalf of international borrowers by issuing bonds, etc.

OFFSHORE BANKING UNITS

Offshore banking units normally comprise sub-offices of multinational banks

set- up to freely transact in international currencies especially with non-residents. The motivating force behind such transactions is usually the highrates of interest on deposits and loans, coupled with cost effective services.Offshore banking units offer attractive rates of interest as they are generallyexempted from all types of fiscal levies and monetary controls.

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Some of the fundamental pre-requisites are:

1) The existence of a major domestic financial market,2) A team of experienced, expert support specialists in the field,3) A well-defined background of statutory laws,

4) A system free from restrictions and currency fluctuations, at least as far asnon-resident transactions are concerned,5) An efficient, highly developed, cost-effective telecommunication network,6) The capability of leasing exclusive channels of communication for assessing international data and carrying out treasury operations,7) The presence of regulatory and fiscal incentives such as “no obligation”system for maintaining reserves with the Central Bank, and8) The absence of withholding tax on depositors’ interest income and incometax.

INDIA AND OFFSHORE BANKING

Most of the above-mentioned criteria, barring those relating to fiscalconcessions and those pertaining to monetary and exchange control, aresatisfied to a large extent in India. Since offshore banking is basicallywholesale banking and the risks are greater than normal bankingtransactions, the Indian banks are maintaining large amounts of resources

at their disposal. Also, too many restrictions on the types of activitiesundertaken by offshore banking units may retard the growth of the system.However, if it is to derive maximum benefit from such a center, the countryshould permit its own banks to operate under such a system. If India does not

provide its own units with the required freedom, flexibility, and businessopportunities, it may not be able to generate enough interest amonginternational banks. Further it is absolutely necessary for the monetaryauthority to enhance its own supervisory skills to closely watch thedevelopments of the offshore front and monitor their operations to help the

system develop along sound and healthy lines.

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CAPITAL ADEQUACY RATIOS

Credit management is the challenging functional area in acommercial bank. It cal ls for expert handling, assessing r isk exposure at every stage and securing adequately the safety of funds

exposed. In-spite of best efforts there can be no full-proof safetystandards, resulting in the unpreventable emergence of periodicalsticky or overdue credit. Credit management is therefore a continuoussearch for more secure De-risking (effective risk-management)Standards, and Asset- Liability Management Strategies. Such risk-management expertise built and implemented helps at not eliminatingrisk altogether, but minimizing the same.

INDIA AND THE CAPITAL ADEQUACY STANDARDS

The effect of “Credit-Risk” is being severely felt in India. Based on the

Basel norms, the RBI also issued similar capital adequacy norms for the

Indian banks. According to these guidelines, the banks will have to

identify their Tier I and Tier II Capital and assign risk weights to their

assets. Having done this they will have to assess the Capital to Risk

Weighted Assets Ratio (CRAR). The minimum CRAR is decided by the

Central Banks independently.

TIER I CAPITAL

• Paid-up capital

• Statutory reserves

• Disclosed free reserves

• Capital reserves representing surplus arising out of sale proceeds of

assets

• Equity investments in subsidiaries, intangible assets and losses in the

current period and those brought forward from previous periods will be deducted from Tier I capital.

TIER II CAPITAL

• Undisclosed reserves and cumulative perpetual preference shares

• Revaluation reserves

• General provisions and loss reserves.

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MEASUREMENT OF COUNTRY RISK

As part of the international banking regulation, a new approach is designedto measure the country risk/exposure. The measurement of country exposureis based on a reporting system for international lending information under the auspices of BIS. The measurement is done on a consolidated bank basis.The loans to each foreign country would be included irrespective of whether made by a bank’s head office or by a branch or affiliate abroad. Eachreporting bank in a semi-annual country exposure report, providesinformation about its foreign claims. The claims are segregated by the typeof borrower and by maturity. Loan commitments and other contingenciesare also detailed.

In international lending, the location of the borrower may not coincide withthe location of the ultimate country exposure. For instance, if a US bank hasmade a loan to a borrower in country X and another bank/institution incountry guarantees the loan, then the ultimate country exposure is allocatedto country Y. The country exposure data would enable the examiner

i. To evaluate the amounts, location, maturities, and types of claims a bank has abroad.

ii. To evaluate the amounts of claims reallocated to country of ultimate risk.iii. To compare the exposure levels with the bank’s capital and suggest

areas for further analysis.

The analysis of country exposure involves three steps:

1) An evaluation of countries conditions by research economists andcountries specialists. These evaluations would be made available to

bank examiners for use as background for their analysis of foreign loan portfolios.

2) Disaggregation by the examiner of aggregate exposure throughreference to a bank’s internal records. Special attention would be

paid to the types of borrowers and the maturity distribution of the bank’s foreign claims.

3) The examiner comments on the results of the analysis.

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COUNTRY RISK MANAGEMENT (CRM)

The objective of CRM system is to enable the bank to balance its exposuresin different countries commensurate with the evaluation of the risks. Thesystem rests on two supportive exercises - country risk evaluation and

balanced distribution of international asset and exposures amongst variouscountries. The two exercises converge in setting country limits withinwhich the exposure needs to be controlled. There are prudentialguidelines for fixing country limits for overseas branches. Country limitsmay be fixed with reference to the total assets of the foreign branches heldin the four ‘free’ currencies (US dollar, Pound sterling, Japanese yenand Euro) and with regard to the risk rating of the country.

INTRA-INDUSTRY TRADE

There are a few more factors affecting international trade. These are:

1) High re-entry costs: A firm temporarily facing a slump ininternational demand and/or price for its product may have to continue itssupply, even if it is not economically justifiable, due to high re-entry costs. In

such a situation, international trade will take place despite a comparativedisadvantage being faced by the firm.

2) Economies of scale: Economies of scale may encourage a firm to produce more in order to attain lower per unit cost. This additional outputwould then be unloaded in the foreign markets. Thus, a firm may be able toexport even without enjoying comparative advantage, as a result of scaleeconomies.

3) Currency value: Exchange rates, i.e., value of one currency in termsof another currency may increase or decrease the competitiveness of a

product in the international markets. This may result in a change in thetrading pattern among nations.

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4) Consumer tastes and imperfect competition: Consumer tastes are animportant factor governing international tastes. Due to a perceived differencein quality, brand image of a particular product, or some other psychologicalreason, consumers may be ready to purchase a more expensive productdespite a similar product being available for a lesser price. This may also

happen in case of imperfect competition prevailing where information aboutthe availability of the cheaper product may not be held by a section of theconsumers. These factors would distort the trade patterns.

GROWTH OF INTERNATIONAL TRADE

As we have seen, trade among nations induces countries to specialize in

particular products or in particular varieties of some products. This results ina more efficient allocation and utilization of world resources. As the

producers benefit from specialization and economies of scale and theconsumers get a wider range of products to choose from, the economicactivity increases, thus giving a push to economic growth the world over.

Countries have been trading with each other for several centuries, but ascountries began to appreciate the above-mentioned fact, international tradestarted growing by leaps and bounds. There have been times whencountries showed a reduced interest in such trade and adopted variousmeasures to protect their domestic industries. These protectionist measureswere introduced to tide over temporary difficulties such as the GreatDepression of 1930s, rather than out of any general disinclination towardstrade. In fact, during the last half-a-century, international trade has grown ata rate faster than that of the GDPs of the countries involved. As a result,exports as a percentage of GDP has increased dramatically for a number of countries.

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RISKS INVOLVED IN INTERNATIONAL TRADE

Risks and rewards always go hand-in-hand. True to this maxim, theadvantages of international trade are not unaccompanied by additional risk.

There are two types of additional risks that have to be taken care of whiletrading across nations - exchange risk and country risk.

Exchange risk is the uncertainty of returns induced by unexpected changes inexchange rates. As exchange rates change unexpectedly, they may have anunfavorable effect on sales, prices, costs and profits of exporters andimporters. Country risk refers to the risk of an exporter not receiving his

payment from the importer due to some country specific reasons. Thesereasons may be political (like war), social (civil war), or economic

(extreme liquidity crunch in the economy). Even when the capacity of theimporter to pay is not impaired by any of these reasons, the payment may notcome through due to some currency exchange restriction suddenly imposed

by the importing country. Despite these additional risks, international tradehas proved to be an attractive proposition, and the banks around the globehave contributed heavily to the tremendous growth of the international trade.

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CHAPTER III

INTERNATIONAL

MONETARY SYSTEM

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EXCHANGE RATE SYSTEMS

The exchange rate is formally defined as the value of one currency in termsof another. There are different ways in which the exchange rates on be

determined. Exchange rates may be fixed, floating, or with limitedflexibility. Different systems have different methods of correcting thedisequilibrium between international payments and receipts. Differentmechanisms will be discussed in subsequent sections.

FIXED EXCHANGE RATE SYSTEM

As the name suggests, under a fixed (or pegged) exchange rate system thevalue of a currency in terms of another is fixed. These rates are determined

by governments or the Central Banks of the respective countries. The fixedexchange rates result from countries pegging their currencies to either somecommon commodity or to some particular currency. There is generally some

provision for correction of these fixed rates in case of a fundamentaldisequilibrium. Examples of this system are the gold standard and theBretton Woods System. The particular variations of the fixed rate system are:

Currency board system,

Target zone arrangement (also called currency block)Monetary Union.

CURRENCY BOARD SYSTEM

Under a currency board system, a country fixes the rate of its domesticcurrency in terms of a foreign currency, and its exchange rate in terms of

other currencies depends on the exchange rates between the other currenciesand the currency to which the domestic currency is pegged. Due to pegging,the monetary policies and economic variables of the country of the referencecurrency are reflected in the domestic economy. If the fundamentals of thedomestic economy show a wide disparity with that of the referencecountry’s, there is a pressure on the exchange rate to change accordingly.This may result in a run on the currency, thus forcing the authorities toeither change, or altogether abandon the peg.

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To prevent such an event, the monetary policies are kept in line with that of the reference country by the central monetary authority, called the currency

board. It commits to convert its domestic currency on demand into theforeign anchor currency to an unlimited extent, at the fixed exchange rate.

The currency board maintains reserves of the anchor currency up to 100%or more of the domestic currency in circulation. These reserves aregenerally held in the form of low-risk, interest bearing assets denominated inthe anchor currency. An internationally accepted, relatively stable currencyis generally selected as the anchor currency.

TARGET ZONE ARRANGEMENT

A group of countries sometimes gets together, and agrees to maintain theexchange rates between their currencies within a certain band around fixedcentral exchange rates. This system is called a target zone arrangement.Convergence of economic policies of the participating countries is a

prerequisite for the sustenance of this system. An example of this system isthe European Monetary System under which twelve countries came together in 1979, and attempted to maintain the exchange rates of their currencieswith other member countries’ currencies within a fixed

band around the central exchange rate.

MONETARY UNION

Monetary union is the next logical step of target zone arrangement. Under this system, a group of countries agree to use a common currency, instead of their individual currencies. This eliminates the variability of exchange ratesand the attendant inefficiencies completely. The economic variables of the

member countries have to be quite proximate for the system to be viable. Anindependent, common Central Bank is set-up, which has the sole authority toissue currency and to determine the monetary policy of the group as a whole.The member countries lose the power to use economic variables likeinterest rates to adjust their economies to the phase of economic cycle

being experienced by them. As a result, the region as a whole experiencesthe same inflation rate. This is the most extreme form of management of exchange rates.

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FLOATING EXCHANGE RATE SYSTEM

Under this system, the exchange rates between currencies are variable. These

rates are determined by the demand and supply for the currencies in theinternational market. These, in turn, depend on the flow of money betweenthe countries, which may either result due to international trade in goods or services, or due to purely financial flows. Hence, in case of a deficit or surplus in the Balance of Payments (difference between the inflation rates,interest rates and economic growth of the countries are some of the factorswhich result in such imbalances), the exchange rates get automaticallyadjusted and this leads to a correction in the imbalance. Floating exchangerates can be of two types: Free float and Managed float.

THE INSTITUTIONS

As mentioned earlier, two institutions were set-up as a part of the BrettonWoods System. These institutions and their activities have to be studied indetail in order to understand the system in totality. A few more institutionscame up as a part of this system. The following institutions are discussed

below:

• The International Monetary Fund (IMF)• The International Bank for Reconstruction and Development (IBRD,

also called the World Bank)

• The International Finance Corporation (IFC)• The International Development Association (IDA)• International Monetary Fund (IMF).

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CHAPTER IV

BALANCE OF PAYMENT

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COMPONENTS OF THE BALANCE OF PAYMENTS

ACCOUNT

The BoP account has three main components:

• The current account

• The capital account

• Official reserves

• Errors and omissions.

The Current Account

The current account records all the income-related flows. These flows couldarise on account of trade in goods and services and transfer payments amongcountries. Trade in goods consists of exports and imports. It is alsoreferred to as merchandise trade. As explained earlier, a country’s exports,i.e., sales of goods to residents of another country, are a source of reserves.Similarly, a country’s imports, i.e., purchases of goods from another countryare a use of reserves. Thus, they enter on the credit and the debit side of theBoP account respectively. Trade in services consists of payments and

receipts on account of interest, dividend, professional services, income onassets like patents and copyrights, tourism, transport, insurance, incomefrom other physical property, banking and other financial services,consultancy services and other factor services involving residents of twocountries. As a country receives any of these services and pays for them, itresults in the use of reserves and hence appears on the debit side of theBoP account. If it extends these services and receives payment for thesame, it results in a source of reserves and gets recorded as a credit entry inthat country’s BoP account.



The Capital Account

The capital account records movements on account of international purchaseor sale of assets. Assets include any form in which wealth may be held -money held as cash or in the form of bank deposits, shares, debentures, other debt instruments, real estate, land, factories, antiques, etc. Any purchase of aforeign asset by a resident is entered as a debit item in that country’s BoPaccount, while any purchase by a foreign resident of a domestic asset isrecorded as a credit item. The excess of the credits over debits in thisaccount over a particular period is referred to as the capital account surplus.The excess of debits over credits is known as capital account deficit.

Official Reserves

Official reserves include gold, reserves of convertible foreign currencies,SDRs and balances with the IMF, which are the means of international

payment. Foreign currencies may be held in the form of balances withforeign central banks, or as foreign government securities. The officialreserves account reflects the amount of these “means of international

payment” acquired or lost during the period for which the BoP account isconstructed.

Errors and Omissions

The BoP as a whole is supposed to balance due to the double-entry system.In reality, it may not always balance. The reason is that the data about the

various aspects of international transactions are collected from differentsources. These different sources may differ in coverage, accuracy and timingwhile recording these transactions. Hence an imbalance may creep into theBoP account, which is removed by adding the heading “Errors andOmissions” to it. This account shows the net figure of the imbalance withthe opposite sign, thus balancing the BoP. This figure does not reflect thetotal errors and omissions as some of them get canceled by other errors, andhence do not show up as an imbalance in the BoP statement.

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Risks Affecting the International Banking System

In this era of globalization, with an increase in syndicated lending andconsolidation within the banking industry, all the banks operatinginternationally have become part and parcel of various transactions taking

place across the globe. In the process they may be exposed to different risksthat emanate from various sources. In this context, an understanding of international risk is essential for the modern banker.

A risk can be defined as an unplanned event with financial consequencesresulting in a loss or reduced earnings. A risky proposition may be onewith a potential profit or a looming loss. Risk can be defined as thevolatility of the potential outcome. Let us first see the different types of risk

faced by banks. Banking, by its nature, entails taking a wide array of risks.Banking supervisors need to understand these risks and be satisfied that

banks are adequately measuring and managing them. The key risks faced by banks are discussed below.

TYPES OF RISKS INVOLVED IN INTERNATIONAL BANKING:

CREDIT RISK

The extension of loans is the primary activity of most banks. Lendingactivities require banks to make judgements related to the creditworthinessof borrowers. These judgements may not always prove to be accurate and thecreditworthiness of a borrower may decline over time due to various factors.Since the clients may be situated in different countries, a major risk that

banks face is credit risk or the failure of a counterparty to perform accordingto a contractual arrangement. Large exposures to a single borrower, or to a

group of related borrowers are a common cause of banking problems inthat they represent a credit risk concentration.

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COUNTRY AND TRANSFER RISK

In addition to the counterparty credit risk inherent in lending, internationallending also includes country risk, which refers to risks associated with the

economic, social and political environments of the borrower’s home country.Country risk may be most apparent when lending to foreign governmentsor their agencies, since such lending is typically unsecured, but isimportant to consider when making any foreign loan or investment,whether to public or private borrowers. There is also a component of country risk called “transfer risk” which arises when a borrower’sobligation is not denominated in the local currency. The currency of the obligation may become unavailable to the borrower regardless of its

particular financial condition.

MARKET RISK

Banks face a risk of losses in on and off balance sheet positions arising frommovements in market prices. Established accounting principles cause theserisks to be typically most visible in a bank’s trading activities, whether theyinvolve debt or equity instruments, or foreign exchange or commodity

positions. One specific element of market risk is foreign exchange risk.

According to Maurice D Levi, foreign exchange risk is defined as “thevariance of the domestic-currency value of an asset, liability, or operatingincome that is attributable to unanticipated changes in exchange rates”.Since banks act as “market-makers” in foreign exchange by quoting rates totheir customers and by taking open positions in currencies, the risksinherent in foreign exchange business, particularly in running open foreignexchange positions, are increased during periods of instability in exchangerates.

INTEREST RATE RISK

Interest rate risk refers to the exposure of a bank’s financial condition toadverse movements in interest rates. This risk impacts both the earnings of a

bank as well the economic value of its assets, liabilities and off balance sheetinstruments. The primary forms of interest rate risk to which banks aretypically exposed are:

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• Repricing risk, arising from timing differences in the maturity (for fixed rate) and repricing (for floating rate) of bank assets, liabilitiesand off balance sheet positions;

• Yield curve risk, arising from changes in the slope and shape of theyield curve;

• Basis risk, arising from imperfect correlation in the adjustment of the rates earned and paid on different instruments with otherwisesimilar repricing characteristics; and

• Optional risk, arising from the express or implied options embedded inmany bank assets, liabilities and off balance sheet portfolios.

Although such risk is a normal part of banking, excessive interest rate risk can pose a significant threat to a bank’s earnings and capital base. Managingthis risk is of growing importance in sophisticated financial markets where

customers actively manage their interest rate exposure. International banksneed to pay special attention to the interest rate risk, as interest rates indifferent countries should be taken into consideration.

LIQUIDITY RISK

Liquidity risk arises from the inability of a bank to accommodate decreasesin liabilities or to fund increases in assets. When a bank has inadequateliquidity, it cannot obtain sufficient funds, either by increasing liabilities or

by converting assets promptly, at a reasonable cost, thereby affecting profitability. In most cases, insufficient liquidity may lead to the insolvencyof a bank.

OPERATIONAL RISK

The most important types of operational risk involve breakdowns in

internal controls and corporate governance. Such breakdowns can lead tofinancial losses through error, fraud, or failure to perform in a timely manner or cause the interests of the bank to be compromised in some other way, for example, by its dealers, lending officers or other staff exceeding their authority or conducting business in an unethical or risky manner. Other aspects of operational risk include major failure of information technologysystems or events such as major fires or other disasters. When such thingsoccur, the banks offering international banking services are most affected.

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LEGAL RISK

Banks are subject to various forms of legal risk. This can include the risk that assets will turn out to be worthless or liabilities will turn out to be greater

than expected because of inadequate or incorrect legal advice or documentation. In addition, existing laws may fail to resolve legal issuesinvolving a bank; a court case involving a particular bank may have wider implications for banking business and involve costs to it and many or allother banks; and, laws affecting banks or other commercial enterprises maychange. Banks are particularly susceptible to legal risks when entering newtypes of transactions and when the legal right of counterparty to enter into atransaction is not established. This is mostly true in the case of international

banks.

REPUTATIONAL RISK

Reputational risk arises from operational failures, failure to comply withrelevant laws and regulations, or other sources. Reputational risk is

particularly damaging for banks since the nature of their business requiresmaintaining the confidence of depositors, creditors and the generalmarketplace. For the international banks, though all these risks are present,

the most significant risk is due to the changes in exchange rates, i.e., theforeign exchange risk.

39



CHAPTER VI

INTERNATIONAL CAPITAL

FLOWS

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CAPITAL FLOWS

Most of the capital flows are in the form of Foreign Direct Investments(FDIs) in different countries. This happens when a domestic firm acquiresownership or control over the operations of a foreign subsidiary firm. A firmis said to directly invest abroad if it has a direct or indirect ownership interestof 10 percent or more in a foreign business enterprise. Today, FDI has

become the single most important source of private development financingfor the developing countries and plays an important role in the economicgrowth and development of the developing countries.

REASONS FOR THE FDIS

1) Individual firms may not maximize profits, keeping in view the interest of the stockholders, but, instead, they maximize growth in terms of firms’size. In such cases, FDI is preferred because firms cannot depend onforeign managed firms to operate in their best interests.

2) Other reasons are based on the superior skills, knowledge, or information of the domestic firms as compared to the foreign firms. Suchadvantages would allow the foreign subsidiary of the domestic firm to earn ahigher return than is possible by a foreign-managed firm.

3) FDI may involve new technologies and expertise not available in thedomestic economy.

FDI IN INDIA

The fact that FDI helps accelerate the process of economic development inhost countries made India realize the importance of new technologies for

economic growth. Of late the Government of India is also recognizing thefact that it has to overcome some past practices and adopt the emerging onesin order to make India compete globally. In the process, it has broughtabout major changes in its national policies on FDI. In the recent past, it hasdramatically reduced barriers to FDI, and is wooing multinational firms.The Government of India started promoting FDI through various meanssuch as direct subsidies, extension of tax holidays, and exemptions fromimport duties.

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deposits, banks have the freedom to set the FCNR (B) deposit rates, whichmay be equal or less than LIBOR. Loans and overdraft facilities are availableto the account holders. Since the FCNR (B) account is denominated inforeign currency, the account holder is protected against changes in IndianRupee value against the currency in which the account is denominated.

Non-Resident (External Rupee Account) - NRE Account

Like FCNR (B) Account, NRE Account is also open to only NRIs and OCBs.This type of account can be in any form, i.e., savings, current or term depositsaccount. The account is denominated in Indian Rupees only. Depositaccepting banks have enough discretion regarding the duration of the fixed

deposit. There is normally no ceiling on interest rates, i.e., banks are free todetermine the interest rates. But, in a move to stem the arbitrage opportunitythat existed in the Indian financial market, the RBI imposed a ceiling oninterest on the NRE account. On July 17, 2003 it had capped interest rates on

NRE deposits at 250 basis points over LIBOR. Banks can pay a spread of notmore than 25 basis points above the relevant LIBOR or swap rate on rupeedenominated deposits offered to expatriates under NRE deposits, i.e., theceiling is put at 0.25% plus LIBOR from October 18, 2003. Under the NREscheme, deposits are received in foreign currency and converted into rupees,and converted back into foreign currency on maturity loans and overdraft

facilities are available to the account holders.

External Commercial Borrowings

External Commercial Borrowings (ECB) are borrowings from lendersand investors outside India, who are permitted by the Government as asource of finance for Indian corporates for expansion of existing capacity aswell as for fresh investment. These include commercial bank loans, buyers’

credit, suppliers’ credit, securitized instruments such as Floating Rate Notesand Fixed Rate Bonds, etc., credit from official export credit agencies andcommercial borrowings from the private sector window of MultilateralFinancial Institutions.

The RBI seeks to keep an annual cap or ceiling on access to ECB,consistent with prudent debt management. The Government has decidedto place fresh ECB approvals up to USD 50 millions under the automaticroute. Under this scheme, Indian companies are allowed to raise ECBs

45



up to $ 50 million without any approval from the Government or theRBI. The advantages of ECBs route to the Indian corporates is obvious: it

provides a source of the foreign currency funds, which will be cheaper than the rupee funds. The average maturity for ECB is less than or equal toUS $20 million is 3 years, above that it is 5 years except 100% Export

Oriented Units which is three years.

Global Depository Receipts (GDRS)

The advent of GDRs in India has been mainly due to the Balance of Payments crisis in the early 90s. At this time India did not have enoughforeign exchange balance to meet even the requirements of a fortnight’s

imports. International institutions were not willing to lend because of non-investment credit rating of India. Out of compulsion, rather than by choice,the government (accepting the World Bank suggestions on tiding over thefinancial predicament) gave the permission to allow fundamentally strong

private corporates to raise funds in international capital markets throughequity or equity-related instruments. The Foreign Exchange Regulation Act(FERA) was modified to facilitate investment by foreign investors up to51% of the equity-capital of the companies. Investment even beyond thislimit is also being permitted by the government in certain sectors.

American Depository Receipts (ADRs)

Until 1990, companies had to issue separate receipts in the US (ADRs) and inEurope (IDRs) to access both the markets. The weakness was that there wasno cross-border trading possible as ADRs had to be traded, settled andcleared through the Depository Trust Company (DTC) in the US, while theIDRs could be traded and settled via Euroclear in Europe. It was in April,

1990 when changes in Rule 144A and Regulations of the SEC of the USallowed non-US companies to raise capital in the US market without havingto register the securities with the SEC or changing the financial statements toreflect the US accounting principles. Rule 144A is designed to facilitatecertain investment bodies called Qualified Institutional Buyers (QIBs) toinvest in overseas (non-US) companies without those companies needing togo through the SEC registration process.

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Intermediaries that are involved in an ADR issue perform the same work asin the case of a GDR issue. Additionally, the intermediaries involved willliaison with the QIBs for investing in ADRs. Some of the well knownintermediaries for ADRs/GDRs are, Merrill Lynch International Ltd.,Goldman Sachs & Co., James Capel & Co., Lehman Brothers

International, Robert Fleming Inc., Jardine Fleming, CS First Boston, JPMorgan, etc.

CAPITAL FLIGHT

Capital flight refers to the large capital outflows resulting from unfavorableinvestment conditions in a country. The expected risk and return are the

determinants of the foreign investment. When the risk of investment in acountry rises sharply and/or expected return falls, large outflows of investment funds take place, and the country experiences massive currentaccount deficits. Such outflows are descriptively referred to as capitalflight. The change in the risk-return relationship that gives rise to capitalflight may be due to political or financial crisis, tightening capital controls,tax increases, or fear of domestic-currency devaluation. One of the mostimportant aspects of the capital flight is that fewer resources are available athome to service the debts, and more borrowing is required. Also, capitalflight may be associated with a loss of international reserves and greater

pressure for devaluation of the domestic currency. The capital flight servesthe importance of political and economic stability for encouraging domesticinvestment. A stable, growing developing country faces little, if any,capital flight and attracts foreign capital to aid in expanding its productivecapacity.

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INTERNATIONAL LIQUIDITY

International liquidity refers to the generally accepted means of international payments available for the settlement of the international transactions.

International liquidity encompasses the international reserves and thefacilities for international borrowing for financing the Balance of Paymentsdeficit. International reserves include official holdings of gold, foreignexchange, Special Drawing Rights, and reserve position in the IMF.International reserves do not include private holdings of gold, privateholdings of foreign exchange and long- term international financing.

The IMF provides international liquidity in accordance with the purpose of the fund specified in the Articles of Agreement. Part of the liquidity takes the

form of reserve assets that can be used for Balance of Payments financing(unconditional liquidity), while the other part takes the form of credit tomembers that is generally subject to certain conditions (conditional liquidity).Unconditional liquidity is supplied through allocation of SDRs and also inthe form of reserve positions in the fund which are claims correspondingto the resources that countries have made available to the fund. Membersholding SDRs and reserve positions in the fund can use them to financeBalance of Payments deficits without having to enter into policycommitments with the fund. Conditional liquidity is provided by the IMFunder its various lending activities. Most of the fund’s credit extended

under these arrangements requires an adjustment program that is intendedto promote a sustainable external position for the member. In addition, it isoften the case when the member obtains fund financing under agreedconditions, its access to capital markets is enhanced. This kind of a catalyticrole of the fund has become more important in recent times when privatelending institutions have been less willing to engage in internationallending.

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NON FUND BASED ACTIVITIES OF INTERNATIONAL

Export Factoring:

The commercial banks also finance the import requirements of the customer.These finances mainly take the form of Letter of Credit or Bank Guarantees.

Forfaiting :

Under this mechanism, the forfaiter purchases a bundle of creditinstruments viz. bills of exchange supported by L/C, promissory notes andother freely negotiable instruments on a non recourse basis. The forfaiter discounts the bills, deducts upfront interest and pays the net amount tothe seller. The drafts drawn by the exporter on the importer accepted by theimporter alongwith the letter of credit or guarantee from the overseas bank.In exchange for the discount charged, the forfaiter takes theresponsibility for receiving the payments from the importer. Thus thecredit risk of the importer is entirely taken over by the forfaiter.

Factoring:

Factoring is a financial service primarily designed to provide financialassistance to the firms in managing their receivables. It is a very popular toolof financing in developed countries. The term ‘factoring’ owes its origin toLatin word ‘facere’ which means to make or do to get things done.Especially in USA and UK many firms established solely for this

purpose. In most instances banks and FIIs started setting up their factoring subsidiaries. Factoring basically involves purchasing of receivables from a firm by a financial intermediary called the factor whois adept in managing receivables. Usually the factoring arrangement

between the seller and the factoring firm is an ongoing one and notlimited to any particular transaction, Often the factor provides creditagainst all receivables of the firm.

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The factor charges a fee for this service viz. %age of the receivables. Thecosts involved are interest cost, commission fees etc., the minimum credit

period ranges from 2- 3 months depending on the sales, both the partiesenter into a factoringagreement whose clauses are decided and agreed upon mutually. Generally,

factoring is limited to local sales and for a shorter tenor and is alwayswith recourse.

Types of Factoring:

Recourse Factoring : In this type, the factor can redirect the irrecoverablereceivables to the clients and recover the advance from the client.

Non Recourse Factoring:

a) Advance Factoring: Under this type 75 - 85% of the value of thereceivables factored is provided by the factor. The remaining amount is heldas margin.

b) Maturity Factoring: In this type, the factor pays the client after thecollection or on the guaranteed payment date and no advance payment ismade to the client. He assists the client in collection and insurance against

bad debts.

Letter of Credit (L/C):

Letter of Credit is an undertaking by the bank, issued at the instance of the buyer or importer undertaking to honour the bills of exchange (drafts)drawn under the letter of credit subject to the documents confirming tothe letter of credit terms.

Authorised dealers are permitted to open Letter of Credit (L/C) on behalf of their customers, subject to the normal banking procedures andother provisions. Letter of credits are opened against specific licences or under Open General List (OGL) only on behalf of their customers whomaintain accounts with them.

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Parties to Letter of Credit:

1) Issuing or Opening Bank: It is the bank which at the request of itscustomer (buyer/importer) opens or issues the Letter of Credit favouring the

beneficiary.

2) Advising Bank : It is the bank which advises the issue of letter of credit. Advising of letter of credit is done normally in case of import, letter of credit whereby the overseas letter of credit opening Bank may requestits correspondent bank in India to advise the letter of credit to the

beneficiary

3) Negotiating Bank : This is the bank which negotiates the beneficiary’s drafts. By virtue of negotiation, the negotiating becomes

“holder for value” of the drafts and acquires all the rights conferredupon him by the letter of credit.

4) Confirming Bank : This is the bank which confirms the credit. For e.g., a letter of credit opened by Barclays bank - London is confirmed by any

bank in India. By adding confirmation, the seller is additionally protected because the recovery of money is guaranteed by 2 banks viz. opening bank and confirming bank.

Types of Letter of Credit:

1) Revocable and Irrevocable Letter of Credit : A revocable letter of credit is one the terms of which can be altered/amended withoutthe consent of the beneficiary. An irrevocable letter of credit is onewhose terms cannot be changed without the consent of all the parties tothe letter of credit. An irrevocable letter of credit is therefore the safestguarantee of payment that a creditor can have.

2) Confirmed and Unconfirmed Letter of Credit : A letter of credit inwhich confirmation is added by another bank, it is known as confirmedletter of credit. In case of unconfirmed letter of credit there is noconfirmation.

3) Clean Letter of Credit and Documentary Letter of Credit : Aclean letter of credit is one under which no documents of titleaccompany the bill. In case of documentary credit, the letter of credit is accompanied by the List of documents.

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4) Sight Letter of Credit and Usance Letter of Credit : A sight letter of credit is one where the drafts drawn under the letter of credit are onsight or payment basis i.e. where the documents of title to goods (shippingdocs) will be handed over to the importer on receipt of payment by theletter of credit opening bank/collecting Bank. Usance letter of credit is

one in which the drafts grant a period/usance for payment say 30/60/90days from acceptance. In such cases, the documents will be handed over to the importer by the opening bank on acceptance of the drafts.

5) Fixed Credit or Revolving Credit : In case of fixed credit, i t is openfor a stated amount and the credit becomes completely exhausted assoon as bill aggregating to the amount of the credit have been drawn.Revolving credit is one which enables the seller to export the goodsand the credit becomes continuous.

6) Red Clause Letter of Credit and Green Clause Letter of Credit : Ared clause is one with a clause printed in red and enables thecorrespondent bank in the exporter’s country to grant advances to the

beneficiary for meeting the cost for manufacturing process ing theexportable goods under the specific letter of credit. The issuing bank accepts responsibility for such advances. Green Clause letter of credit is one which authorizes the Warehouse charges as advance to begiven.

7) Transferable Letter of Credit : It is a credit which can be transferredto another. For e.g. a buyer may open in favor of the exporter or middleman. The beneficiary has the advantage of transferring the creditto some other person from whom he will be procuring the goods for onward export. The terms of transferred letter of credit are same asthe parent or original letter of credit except the rate/price of the merchandise.

8) Back to Back Letter of Credit: This is a credit opened on the basis of

another letter of credit. The difference between the transferable letter of credit an Back to Back is that whereas in back to back, a second credit isopened on the strength of the first letter of credit, in the case of transferable letter of credit the benefit of the credit is transferred to theseller of the goods.

53



Bank Guarantees:

At the request of the customer, the bank issues guarantees favouring the beneficiaries. Thus the contract of a guarantee is a tri-partite contract. The

customer is the person at whose request the guarantee is issued, the bank isthe guarantor and the payee/ beneficiary i.e. the person in whose favor theguarantee is issued. The bank charges commission for issue of guaranteewhich is an income for the bank. The guarantee is a non-fund basedfacility as the liability on the bank may or may not crystallize on the duedate based on the failure to perform the contract by the borrower.

Therefore they are shown as contingent liability by way of Footnote toaccounts.

The guarantees are of 2 types viz.:

(1) Performance guarantee, and(2) Financial guarantee.

Performance guarantees normally guarantees the Performance of thecontract.Financial guarantees represent the guarantee for ensuring thefinancial obligations.

54



EXPORT CREDIT AND GUARANTEE CORPORATION (ECGC):

With a view to protect a shelter to the exporters against the exportrisks, ECGC was established in 1957 by the Government of India under

the administrative control of ministry of commerce. It is managed byBoard of Directors comprising of representatives of the Government,Reserve Bank of India, Banks, Insurance and exporting Community.ECGC is the 5th largest credit insurer of the world presently covers 17.31%of India’s total exports with a paid up capital of rs.1.50bn.

Major Functions of ECGC:

(1) To provide a range of credit risk insurance covers to exportersagainst a loss in export of goods and services

(2) To offer guarantees to banks and financial institutions to enableexporters obtain better facilities from them.

ECGC also helps exporters by:

(1) Providing insurance protection to exporters against payment risks.(2) Providing guidance in export related activities.(3) Providing information on creditworthiness of overseas buyers.

(4) Providing information on about 180 countries with its own creditratings.

(5) Making it easy to obtain export finance from banks/financialinstitutions.

(6) Assisting exporters in recovering bad debts.

Guarantees to Banks :

ECGC has designed a scheme of guarantees to banks with a view toenhance the credit worthiness of the exporters so that they are able to secure

better and large credit facilities from their bankers, the guarantees seek toachieve this objective by assuring the banks that in the event of an exporter failing to discharge his liabilities to the bank and thereby making the banksto incur loss. ECGC would make a good a major portion of the banks loss.The bank is required to be a co-insurer to the extent of the remaining loss.Any amount recovered from the exporter subsequent to payment of claims

55



shall be shared between the corporation and the bank in same ratio in whichthe loss was borne by them at the time of settlement of claim. To meet thevarying needs of the exporters the corporation has evolved the followingtypes of guarantees:

(a) Packing credit guarantee(b) Export production finance guarantee(c) Post shipment export credit guarantee(d) Export finance guarantee(e) Export performance guarantee(f) Export finance (overseas lending) guarantee

Guarantees - Overseas Construction Projects:

Guarantees are issued by the EXIM bank on behalf o exports of turnkey projects and construction contracts. Such guarantees include:

Bid bond guaranteeAdvance Payment guaranteePerformance guaranteeRetention money guarantee andGuarantee for borrowing abroad.

Bid bond guarantee is issued for a maximum period of 6 months. For advance payment guarantee, exporters are expected to secure

mobilization advance of 10-20% of contract value. Performance guarantee for 5- 10% of contract is issued and is valued

up to one year after completion of the contact. Guarantee for release of retention money enables the exporter to

obtain the release of full payments. Bridge finance may be neededat the earlier phases of the contract.

Up to 10% of the contract value may be raised in foreign currencyfrom a foreign bank against the EXIM Bank's guarantee for borrowingabroad.

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Depository Bank : Depository Bank is involved only in the issue of DRs.It is responsible for issuing the actual DRs, disseminating informationfrom the issuer to the DR holders, paying any dividends or other distributions and facilitating the exchange of DRs into underlyingshares when presented for redemption.

Custodian: The Custodian holds the shares underlying the DRs on behalf of the depository and is responsible for collecting rupee dividends onthe underlying shares and repatriation of the same to the Depositoryin US dollars/ foreign currency.

Export Import Bank of India (EXIM Bank):

EXIM Bank was set up to finance and promote foreign trade. It extendsfinance to the exporters of capital and manufactured goods, exporters of software and consultancy services and to overseas joint ventures andturnkey or construction projects abroad. Term loans are also extended to

projects located in export zones.Exim bank financing can, if required, supplement working capital

finance extended by commercial banks at pre shipment stage. The functionsof the Exim bank are lending, guaranteeing, promotional and advisoryservices.

Lending

To Indian com panies To foreign governm entsand foreign com panies

To Indian Banks

D irect assistance B uyers credit B ills rediscounting

Consultancy and technologyservices

Lines of credit R efinance

O v e r s ea s i n v es t m en tfinance

Re lending facility

Preshipm ent credit

Deem ed exports

100% expor t or iented uni tsand free trade zones

Forfaiting

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EXAMPLE:

UCOBANK

INTERNATIONAL BANKING:

UCOBANK has international presence for over 50 years now. UCO presently has four overseas branches in two important international financialcentres in Singapore and Hong Kong and representative office at KualaLumpur, Malaysia.

The international linkage from India is supported by a large Indiannetwork through Integrated Treasury Branch, International Banking Branchesand Authorized Forex Branches. Other branches in India also provide

international banking facilities through their Authorised Branches.

SERVICES PROVIDED:

All the facilities are subject to the prevalent rules & guidelines of the Bank and RBI. Brief details of services provided are as under:-

1. NRI Banking

2. Foreign Currency Loans 3. Finance/Services to Exporters4. Finance/Services to Importers5. Remittances6. Forex & Treasury Services7. Resident Foreign Currency (Domestic) Deposits8. Correspondent Banking Services9. All General Banking Services

1) FOREIGN CURRENCY LOANS

a) In India (FCNR 'B' Loans):

UCO allows loans in foreign currency to NRIs against their FCNR(B)Deposits at the Indian Branches. The details are available in NRI Bankingsection.

b) From Outside India:

59

http://www.ucobank.com/international_forexbranches.htm

http://www.ucobank.com/nri.htm

http://www.ucobank.com/#FOREIGN

http://www.ucobank.com/#EXPORTERS

http://www.ucobank.com/#IMPORTERS

http://www.ucobank.com/#REMITTANCES

http://www.ucobank.com/#FOREX

http://www.ucobank.com/#RESIDENT

http://www.ucobank.com/#CORRESPONDENT

http://www.ucobank.com/nri.htm

http://www.ucobank.com/#FOREIGN

http://www.ucobank.com/#EXPORTERS

http://www.ucobank.com/#IMPORTERS

http://www.ucobank.com/#REMITTANCES

http://www.ucobank.com/#FOREX

http://www.ucobank.com/#RESIDENT

http://www.ucobank.com/#CORRESPONDENT

http://www.ucobank.com/international_forexbranches.htm



2) FINANCE/SERVICES TO EXPORTERS

UCOGOLD CARD FOR EXPORTERS

Types of Facilities for Exports

a) Rupee Export Credit (pre-shipment and post-shipment): b) Pre-shipment Credit in Foreign Currency (PCFC):

Repayment:

c) Negotiation of Bills under L/Cd) Export Bill Rediscounting Bank Guarantees:

UCO, on behalf of exporter constituents, issues guarantees in favour of

beneficiaries abroad. The guarantees may be Performance and Financial. For Indian exporters, guarantees are issued in compliance to RBI guidelines. 3) FINANCE/SERVICES TO IMPORTERS

a) Collection of Import Bills:

b) Letter of Credit:

c) Financing of import

Usance L/C facilityDeferred Payment Guarantee/Standby LCRupee financeForeign Currency Loans

d) Bank Guarantees

4) REMITTANCES

5) FOREX & TREASURY SERVICES

Sale & Purchase of currency on behalf of customersForward Cover BookingsCross Currency SwapsInterest Rate Swaps (IRS)Forward Rate Arrangements (FRAs)Forex Money Market OperationsForex Services For Corporate

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6) RESIDENT FOREIGN CURRENCY (DOMESTIC) A/Cs

7) CORRESPONDENT BANKING SERVICES

UCO can provide the following main services:-

i) Collection of bills both Documentary and Clean.ii) Advising/confirming of L/Cs opened by banks.iii) Discounting of Bills drawn under L/Cs.iv) Maintenance of foreign currency accounts in S$ and HK$.v) Maintenance of Rupee accounts in India.vi) Making foreign currency payments/remittance on

behalf of customers of banks.

EXTERNAL COMMERCIAL BORROWING (ECB)

ECB includes the following:-

i) Commercial Loans.ii) Syndicated Loans.iii) Floating/Fixed rate notes and bonds.iv) Lines of Credit from foreign banks and financial institutions.v) Import loans, loans from the export credit agencies of

other countries.

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CONCLUSION

The Globalization has intensified the activities in the international

bank market to a very large extent. The competition has increased manifoldand each bank searches means to differentiate itself from the others.International Banking are bridging the gap between the lenders and

borrowers in a more effective manner and are encouraging banks inenhancing the world’s output. The international banking system is underlined

by procedures, customs, instruments and organizational settings that providea workable multi lateral payment arrangement among different countries.Many legal problems crop up in international banking transactions becausesuch transactions inevitably impinge upon the laws of more than one country.The gaps that arise either deliberately or unintentionally as a result of

regulations, give rise to arbitrage opportunities in banking.

World trade has grown rapidly in the last few decades. These latestdevelopments can be reasonably expected to make it grow at an even faster rate. The only thing that is certain is that the world as a whole is going totremendously benefit by this coming together of nations in an attempt tosought out their differences and to find a mutually benefiting solutions to thevarious problems facing them. In these process, the International Bankingsystem has played the role of constructive intermediary in promoting the

International Trade.

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BIBLIOGRAPHY

• INTERNATIONAL BANKING (Indian Institute of Bankers IIB)

• MONEY, BANKING, INL TRADE & PUBLIC FINANCE (TaehoKim)

• INTERNATIONAL BANKING (ICFAI)

• INTERNATIONAL BANKING & FINANCE (P. K. Bandgar)

WEBSITES

• UCO BANK. COM

• GOOGLE.COM

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ACKNOWLEDGEMENT

international bnkin - final

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