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INTERNATIONAL BANKING

CHAPTER NO- 1.

INTRODUCTION TO INTERNATIONAL BANKING

INTRODUCTION

The emphasis is on the theory and practice of international banking,

because of its critical importance in the modern banking framework.

International banking is not a new phenomenon; international bank

activity can be traced back to as early as the 13

th

century. International banking helps us to know how important international banking for the

progress of India and also for the counter. It is one of the most important

factors responsible for economic growth of the nation. Banks in many

nations have internationalized their operation since 1970. The quantum of

operation has increased in such a manner that the concept evolved into a

subject in itself. The term multinational banking signifies the presence of

banking facilities in more than one country. “Aiber has defined

International banking as a subset of commercial banking transactions and

activity having a cross border or cross currency element”. Domestic

operation such as the currency of denomination of the transaction, the

residence of the bank customer and location of the banking office the

range of transactions comprised by International banking can be easily

distinguished. A deposit or a loan transacted in local currency between a

bank in its home country and a resident of that same country is termed as

pure domestic banking.

In order to be a success in our export activities, we need to know

how to finance our import or export and how to get paid, especially when

dealing in foreign currencies. Our banker can and should be a keymember of our advisory team. Finding a bank that is comfortable and

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proficient in providing the various products and services required by

exporting and importing firms is becoming easier as international sales

become more and more common. The expansion of the internet and the

advent of e-banking are also helping to increase the number of banks that

companies can work with for their international banking requirements.

HISTORY OF INTERNATIONAL BANK

The origin of international banking dates back to the second century BC

when Babylonian temples safeguarded the idle funds and extended loans

to merchants to finance the movements of goods. The loans extended by

the Florentine banking houses were the first instance of international

lending by the of the modern banks to the forerunners of the modern

governments. During the nineteenth century many innovations were

witnessed in the international lending, leading to trade financing and

investment banking. Trade financing started as short term lending. Of the

two investments banking accounted further great bulk of the international

lending and financial companies acted as agents or underwriters for the

placement of funds and thus originated the concept of “Capital Markets”.

By 1920, American banking institutions dominated international lending,

and the European nations were the major borrowers. There was perfect

international banking system existing till the time of First World War.

The Britton system had installed a secured financial framework and

revolutionized the economic life by creating a global shopping center.

International banking speeded up after the first oil crisis in 1973. Progress

in the telecommunications sector across the world supplemented the

growth of international banking.

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DEFINITIONS OF AN INTERNATIONAL BANK.

According to Caliber (1984) there are at least three different definitions

of an international bank.

1. A bank may be said to be international if it uses branches or

subsidiaries in foreign countries to conduct business. For example,

the scale of US dollar – denominated deposits in Toronto by

American banks with Canadian subsidiaries would constitute

international banking; the sale of the same deposits by Canadian banks would be classified as domestic banking.

2. Definition of international banking relates to the currency

denomination of the loan or deposit, independent of the location of

the bank. Any sterling transaction undertaken by a bank

headquartered in the UK would be part of British domestic

banking, irrespective of whether this transaction is carried out in a

British branch or a subsidiary located outside the UK. But

transactions in currencies other than sterling will be part of

international banking, independent of the actual location of the

British branch.

3. way of defining international banking is by the nationality of the

customer and the bank. If the headquarters of the bank and

customer have the same national identity, then any banking

operation done for this customer is a domestic activity,

independent of the location of the branch or the currency

denomination of the transaction. For example, all Japanese

banking carried out on behalf of Japanese corporate customers

would be part of the domestic banking system in Japan, even if

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both the branch and the firm are subsidiaries located in Wales.

Noting these different definition, Caliber (1984) opted for one

close to the second definition, relating international banking

activities to the association between national currency of the

transaction and the country which has chartered the bank. A bank

is said to be engaging in international banking when it sells

deposits and buys loans in currencies other than the home currency

– that is, the currency of the country in which it is chartered. Other

authors have advocated the use of the other definitions.

CHARACTERISTICS AND DIMENTION

Though international banking concept is quite old, it has acquired certain

new characteristics and dimensions. The number of participants, whichat the beginning of the period were mainly American banks, has widened

to include German, UK, Japanese, and French and Italian banks. Nearly

three quarters of the deficit of less developed countries are financed by

commercial banks operating internationally. The maturities have risen

considerably and now the average maturities are about ten years. Banks

have started diversifying their sources of funds along with the assets.

Apart from the above, two novel kinds of overseas bank operations

characterized international bank expansion in the late 1960s and 1970s.

i) A multinational consortium bank, was created by severalestablished by parent banks, and

ii) The shell branch, which is not really a bank but a device to getaround the domestic government regulation, was created.

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FEATURES OF INTERNATIONAL BANKING

International banks are organized in various formal and informal ways

from simply holding account with each other to holding commonownership.

CORRESPONDENT BANKING – This represents an informal linkage

between banks and its customers in different countries. The linkage is

setup when banks maintain correspondent accounts with each other

and facilitates international payments and collections for customers.

BANK AGENCIES – The agency mostly deal in the local currency

markets and in the foreign exchange markets, arranges loans and

clears cherubs.

FOREIGN BRANCHES – These are operating banks and are subject to

local banking rules and the rules at home. These branches most of the

time offer quality services and safety that are provided by a large bank

to the customers in small countries.

CURRENCY RISK – International Bank operate in different

currencies. Currencies may weaken or strengthen with respect to each

other. Accordingly wealth value of the bank may vary. This is a

significantly sensitive aspect in International arena.

COMPLEXITY OF CREDIT – Credit risk has additional dimensions of

sovereign-political risk and also socio-cultural factor about honoring

credit.

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COMPETITION FOR MARKET SHARE AMONG BANKS- Competition

is stiff because of many giant bankers. This in effect reduces margins

and demands highly efficient performance.

CYCLICAL NATURE, WITH PERIODIC CRISES- World economies

are not moving in unison. Cycles of growth and recession move from

one continent to another Multinational bank face these waves and also

occasional crisis such as crash of economy. (Eg. South Asian crisis)

COMPETITION FOR BANK LOANS FROM THE INTERNATIONAL

BOND MARKET – Treat of disintermediation is more because

international banking has many big value transaction which may

eventually bypass banks. Bond market is matured in developed

countries, even for foreign currency denominated bonds.

IMPORTANCE OF INTERNATIONAL INTERBANK MARKET – As

source of liquidity and funding of banks, interbank transactions in

banker enjoy better liquidity solution.

NATURE OF INTERNATIONAL BANKS

International banking refers to the banking services that cover a wide

array of topics. It provides you personal bank accounts along with the

business bank accounts also. An important feature of international

banking is foreign currency services. This is a very useful feature for the

people who need to deal in different currencies. You can make

transactions in dollars, euro or Swiss franc.

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GETTING EXPERT ADVICE:-

Another useful service that you get from international banking

organizations is traveler's checks. All of us know the importance of

traveler's check during the traveling period. Not only can you open a

foreign currency account but you can also seek help from experts

regarding the international trade such as import and export of goods.

International banking institutes have investment consultants that can

guide you on how to improve international trade. You can manage our

bank accounts in foreign countries without any trouble. It has many

other benefits also associated with it. For example, you can save a great

amount of money because of lower or no taxes at all. It definitely gives

you an edge over our competitors. Globalization is the mantra today.

Every business owner whether he is running a small business or big

business wishes to expand his or her business beyond the boundaries of

nations. International banking is a necessary tool to globalize our

business. You cannot underestimate this feature because you cannot

grow fast without crossing the geographical boundaries. When you

expand our business in several countries you need an effective system to

manage our finances. International banking organizations offer you just

the right kind of services that you need as a multinational business

owner. International banks have branches in many different countries.This gives you the liberty of making payments in any of these countries.

Moreover, you can get the payment in local currency saving a big

amount on transactional fees. The relations between the countries and

international scenario make a huge impact on international trade.

International banking services too cannot remain unaffected by the

political developments at the international level. That is why

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international banks have to observe keenly not only the economic

changes but political changes as well.

So, it is well-established fact now that you need international bankingservices to globalize business. However, you should not select any

international bank in a hurry. Perform a thorough research on the bank

before you decide to open an account with them. You should ascertain

that the bank offers reliable and stable services to its customers.

INTERNATIONAL BANKING SERVICES WE NEED

International banking services are available to individuals and

corporations that do business internationally. The need for international

banking is a requirement of anyone who has extensive business

relationships in foreign countries or is looking to expand into the foreign

marketplace. The essential services that you need when choosing toestablish an international banking relationship are private banking

services, the ability to convert or exchange our currency and paying and

receiving payment for our goods and services. These services are the

basic level of services you require in order to be successful at

international banking.

1. Private Banking

Private banking involves the offer of loan rates and other products

and services that are not generally available to retail customers. A private

banking relationship with our international bank gives you access to

special offerings and greater discretion in the way our accounttransactions are handled or the priority you account is given.

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Advantages

•Private banking gives you exclusive action to special deals and rates.

•You become a prime banking customer with the bank.

Disadvantages

•You may be subject to some additional scrutiny, depending on thecountry in which you are doing business.

•Our account may be subject to special taxation or assessment, dependingon the foreign country.

2. Foreign Currency Exchange

We should have a currency exchange service set up in order to

take advantage of changes in currency rates between countries when

traveling. The foreign currency exchange department for an international

bank can help determine the best time to exchange our U.S. dollars for

local currency as well as trade currency contracts for you to increase our

account’s income.

Advantages

•Helps you take advantage of differences in exchange rates.

•Gives you an opportunity to profit from foreign currency trading.

Disadvantages

•you may have to pay higher service fees on certain currencytransactions.

•It is difficult to predict changes in currency rates, which may result insome losses for you.

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3. Money Transfer and Collection

As you operate our business with foreign companies, the ability to collect

receivables and pay bills is important. A money transfer and collection

facility within an international bank allows you to transfer and receive

payments in an efficient and timely manner without worrying about time

or having to be present to complete transactions.

Advantages

•You can pay bills and complete payments without the need to be present.

Disadvantages

•You are relying heavily on the abilities of the bank to completetransactions in a timely manner.

International banking services are available to individuals and

corporations that do business internationally. The need for international

banking is a requirement of anyone who has extensive business

relationships in foreign countries or is looking to expand into the foreignmarketplace. An international bank can help you meet our banking needs

when playing on the world stage by providing you with essential services

and assistance.

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CHAPTER NO- 2.

DEVELOPMENT OF INTERNATIONAL BANKING

INTERNATIONAL TRADE IN BANKING SERVICES

International trade theory may be used to address the issue of why

banks engage in the trade of international bank services. Comparative

advantage is the basic principle behind the international trade of goods

and services. A country is said to have comparative advantage in the production of a good (or service) if it is produced more efficiently in this

country than anywhere else in the world. The economic welfare of a

country increases if the country exports the goods in which it has a

comparative advantage and imports goods and services from countries

which are relatively more efficient in their production. At firm level,

firms engage in international trade because of competitive advantage.The exploit arbitrage opportunities.

A firm will export a good or service from one country and sell it in

another because there is an opportunity to profit from arbitrage. In

banking, the traditional core product is an intermediary service, accepting

deposits from some customers and lending funds to others. The

intermediary function involves portfolio diversification and asset

evaluation. A bank which diversifies its assets can offer a risk / return

combination of financial assets to individual investors / depositors at a

lower transactions cost than would be possible if the individual investor

were to attempt the same diversification. Banks also offer the evaluation

of credit and other risks for the uninitiated depositor or investor. The

bank acts as a filter to evaluate signals in a financial environment wherethe amount of information available is limited. If banks offer

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international portfolio diversification and or credit evaluation services on

a global basis, they are engaging in the international trade of their

intermediary service.

For example, a bank may possess a competitive advantage in the

evaluation of the riskiness of international assets, and therefore, its

optimal portfolio of assets will include foreign currency denominated

assets. A by- product of intermediation is bank participation in the

payments system, including settlement, direct debit, and chequing

facilities. If some of its corporate or retail customers engage in

international trade activity, they will require global money transmission

services. The simplest example is the provision of foreign exchange

facilities across national frontiers is now well developed. In parts of

Europe, it is possible to use a debit card from one state (for example, the

UK) to obtain local currency in another state (for example, Spain). To

conclude, if a bank offers its intermediary or payments services across

national boundaries, it is engaging in international trade activities and is

like any other global firm which seeks to boost its profitability through

international trade.

COST AND BENEFITS OF INTERNATIONAL BANKING

The costs and benefits of the international banking system are

reviewed with the objective of assessing the effect of the international

banking development on the welfare of the national economies. The key

benefit from international banking is a rise in bank consumer surplus, the

difference between what a consumer is willing to pay for a bank service

and what the consumer (who in the case of international banking, is

probably a corporate customer) does pay. For bank products, consumer

surplus will increase if deposit rates raise, loans rates fall, and fees for

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abandon the reserve ratio requirement, or eliminate controls on

deposit rates.

2. The international banking system is not truly global, because it is

largely confined to the wholesale banking market. This means

there is discrimination in loan and deposit rates, those having

access to the offshore banks getting more favorable terms than

their fellow nationals. Since only some of the customers in a

national economy gain, it will not be possible to judge whether

there is a net gain accruing to residents of a give country.

3. The diversion of banking activity from onshore to offshore alters

the real resource costs of banking. Whether they increase or

decline is governed by the cost differential between inshore and

offshore banking. The movements of the loan and deposit rates in

the Euromarkets since their operation began suggest the real

resource costs have been lower. But they may have beenunderestimated for several reasons. For example, the banks

underestimated the cost of lending in the Eurocurrency markets,

especially in the case of sovereign loans; banks thought this type of

lending was almost risk – free, because a country could not be

declared insolvent. More generally, banks lack experience in

setting the prices for newer financial products, commensurate with

their risk. Information asymmetries are normally more pronounced

in international banking. In the Euro market only the final lender

has certain knowledge of who the borrower is, the average deposit

passing through several banks before being loaned to a non-bank

borrower. Often, the exposure of other banks in the Euromarkets is

unknown to each individual bank.

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CHAPTER NO – 3.

PRODUCTS & SERVICES

The international banking services in India are provided for the benefit of

Indian customers, corporate, NRIs, Overseas Corporate Bodies, Foreign

Companies/ Individuals as well as Foreign Banks etc. by UCO Banks

International Banking Branches, Authorized Forex Branches and

Integrated Treasury Branch. Other branches in India also provide

international banking facilities through the aforesaid network of UCO

Banks branches. 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 (Please visit NRI Corner)

2. Foreign Currency Loans

3. Finance/Services to Exporters

4. Finance/Services to Importers

5. Remittances

6. Fore & Treasury Services

7. Resident Foreign Currency (Domestic) Deposits

8. Correspondent Banking Services

9. All General Banking Services

I. NRI BANKING

DEPOSIT SCHEMES FOR NRI's

• Foreign Currency Non resident (FCNR-B) Deposits:

Customer’s overseas earnings remain fully repatriable in an FCNR (B)

Deposit account with UCO bank.

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http://www.ucobank.com/nri3.htm

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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




• Reparability

The principal amount and interest earned are fully repatriable.

• Tax Exemption

The Deposit is exempted from Indian Wealth tax. Interest is exempted

from Indian Income tax.

• Choice of Currency

Place our deposit in any of the six international currencies USD, GBP,

Euro, JPY, AUD & CAD. For deposit at any of our authorized branches

in India, please remit money to our Treasury Branch Mumbai accounts

with full details.

• Remit in any Currency

Customers can remit in any convertible currency. UCO Bank shall

convert it in any of the above six currencies of our choice.During the

customers visit to India the customer may also tender foreign currency

notes/travelers cherubs to UCO banks branches.

• Minimum & Maximum Amount

There is no upper ceiling; customer can put any amount in these deposits.

The minimum amount for each currency is: USD 2,000 or its equivalent

• Earn Attractive Interest

• Large Number of Branches to choose from

• Choose the Term of Deposit

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From a minimum period of 12 months to a maximum period of 60

months, customer has the choice of keeping the deposit with the

bank. Bank also allows the customer the flexibility of closing the

customers Fixed Deposit account before the due date but the

interest rate payable will be subject to a penalty of 1%. Customers

deposit should have run for a minimum period of one year to be

eligible for interest.

• Automatic Renewal

Customers deposits are automatically renewed on maturity for the

same tenure in case no other instructions are received before due

date.

• Joint account

Customer can open a joint account with the bank with other Non-

Resident Indian(s).

• Power of Attorney (P/A)

P/A to Residents permitted for local disbursements only.

• Nomination

Customer can register nomination for this Account.

Loans available against FCNR deposits Banks offer Rupee as well as

Foreign Currency Loans in the currency of Deposit against security of

our FCNR Deposits in UCO banks authorized branches in India. The

overseas branches also offer foreign currency loans against these

deposits, subject to rules, if any, applicable in that country.

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LOANS TO NRIS

Against Deposits

Bank gives loans against NR deposits to NRI deposit account holder and

third parties in Indian Rupees. Bank gives loans against FCNR (B)

deposits to NRI deposit account holder in foreign currency in India. This

facility is available at our overseas branches, subject to local directives, if

any in that country.

NRI Home Loans

Bank has attractive schemes to accommodate the housing needs of NRIs.

i. Loans for Residential Property NRIs can avail of loans for

• Construction of a new residential house

• Purchase of a residential flat or residential house

• Extension of a residential flat or residential house

ii. Renovation of a residential flat or residential house

iii. Loan for Plot of Land for residential use

NRIs can avail of loans for purchase of a residential plot of land for

residential use.

iv. Loans against existing residential property

NRIs can avail of loans by mortgaging an existing residential property for

any of the following purposes. The loan shall be utilized for meeting the

borrower's personal requirements or for his own business purposes :-

Education , Business ,Medical treatment.

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Prohibition:

The proceeds of rupee loan should not be utilized for any of the

following activities:

The business of chit fund, or

Agricultural or plantation activities or in real estate business, or

construction of farm houses, or

Trading in Transferable Development Rights (TDRs), or

Investment in capital market including margin trading and derivatives.

II. FOREIGN CURRENCY LOANS

a) In India (FCNR 'B' Loans): The foreign currency

denominated loans in India are granted out of the pool of foreign currency

funds of the Bank in FCNR Deposit etc. accounts as permitted by

Reserve Bank of India. These loans are commonly known as FCNR

Loans.

UCO has a broad base of NRI customers/depositors. Therefore, with the

resource base of FCNR deposits etc. UCO is in a position to offer the

Foreign Currency Loans in India to our customers as an alternative to

loans in Rupees.

These loans are denominated in foreign currency such as US Dollars and

are offered as short term loans. The interest is fixed with a reasonable

spread over LIBOR

UCO also allows loans in foreign currency to NRIs against their

FCNR Deposits at the Indian Branches. The details are available in

NRI banking section.

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b) From Outside India: With presence at two major financial

centers of the world, UCO has foreign currency resources to arrange

/grant Foreign Currency Loans to Indian as well as multinational

corporate at the competitive rates. The foreign currencies denominated

loans are granted by our overseas branches to Indian Corporate as per

External Commercial Borrowing (ECB) Policy of Govt. of India/RBI.

III. FINANCE SERVICES TO EXPORTERS

UCO GOLD CARD FOR EXPORTERS: -

UCO launches Gold card for creditworthy exporters - Simplified

access to export credit on very good terms Better terms of credit

including rates of interest than those extended to other exporters by the

Bank. Processing of applications for credit faster than for other

exporters. Simpler norms, subject to specific requirements in each case, if

any. 'In-principle' limits for a period of 3 years with a provision for

automatic renewal, subject to fulfillment of the terms and conditions of

sanction. Preference for grant of packing credit in foreign currency

(PCFC), subject to availability of foreign currency funds. Lower charges

schedule and fee-structure than those provided to other exporters.

Relaxations in the norms in respect of security and collaterals, wherever

feasible. Other facility/benefit to the exporters, subject to the fulfillment

of extant rules and regulations applicable to export finance.

TYPES of FACILITIES FOR EXPORTS

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http://www.ucobank.com/international_banking.htm#ECB

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a) Rupee Export Credit (pre-shipment and post- shipment):

UCO provides both pre and post shipment credit to the Indian exporters

through Rupee Denominated Loans as well as foreign currency loans inIndia. Credit facilities are sanctioned to exporters who satisfy credit

exposure norms of UCO. Exporters having firm export orders or

confirmed L/C from a bank are eligible to avail the export credit

facilities. Rupee export credit is available for a maximum period of 180

days from the date of first disbursement. In deserving cases extension

may be permitted within the guidelines of RBI. The corporate may also

book forward contracts with UCO in respect of future export credit

drawls, if required, as per the guidelines/directives provided by RBI.

b) Pre-shipment Credit in Foreign Currency (PCFC):

UCO offers PCFC in the foreign currency to the exporters enabling them

to fund their procurement, manufacturing/processing and packing

requirements. These loans are available at very competitive international

interest rates covering the cost of both domestic as well as import content

of the exports. The corporate /exporters with a good track record can

avail a running account facility with UCO for PCFC. PCFC in foreign

currency is available for a maximum period of 180 days from the date of

first disbursement similar to the case of Rupee facility.

Features:

In the PCFC drawls permitted in a foreign currency other than the

currency of export, exporter bears the risk in currency fluctuations. The

foreign currency drawls are restricted to major currencies at present. In

case, the export order is in a non-designated currency, PCFC is given in

US$. For orders in Euro, Pound Sterling and JPY, PCFC can be availed

21




in the respective currencies or US$ at the choice of exporter. Multi

-currency drawls against the same order, are not permitted at present due

to operational inconvenience.

Repayment:

PCFC is to be repaid with the proceeds of the export bill submitted

after shipment. In case of cancellation of export order, the PCFC can be

closed by selling equivalent amount of foreign exchange at TT selling

rate prevalent on the date of liquidation.

c) Negotiation of Bills under L/C:

UCO's International Banking Branches and Authorized Forex

Branches are active in negotiation/discounting of sight /Usance

international export bills under L/Cs opened by foreign banks as well as

branches of Indian banks abroad. UCO offers the most competitive rates.

These transactions are undertaken by our branches within the

Bank/Country Exposure ceilings prescribed by UCO.

d) Export Bill Rediscounting:

UCO provides financing of export by way of discounting of export

bills, as post shipment finance to the exporters at competitive

international rate of interest. This facility is available in four currencies

i.e. US$, Pound Sterling, Euro and JPY. The export bills (both Sight and

Usance) drawn in compliance of FEMA can be purchased/ discounted.

Exporters can avail this facility from UCO to cover the bills drawn under

L/C as well as other export bills.

e) Bank Guarantees:

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I. Usance L/C facility UCO's Usance L/C facility provides the

importer an opportunity to avail credit from their

supplier/supplier's bank.

II. Deferred Payment Guarantee/Standby LC

UCO's Deferred Payment Guarantee/Standby LC facility also provides

the importer an opportunity to avail credit from their

supplier/supplier's bank.

III. Foreign Currency Loans

Short term External Commercial Borrowings or Trade Credits for less

than three years as permitted by RBI for imports into India is allowed

by our overseas branches to Indian importers at very competitive rates.

These are generally backed by L/Cs opened by importer's bank. Indian

importers can also avail this facility from our overseas branches as

roll-over credit on their bank agreeing to extend the L/C in favor of

our overseas branches.

d) Bank Guarantees:

UCO, on behalf of importer constituents or other customers, issues

guarantees in favor of beneficiaries abroad. The guarantees may be both

Performance and Financial.

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V. REMITTANCES

Remit through us EITHER to our own account with us or any other bank

OR to our near and dear ones. We offer an efficient, easy and convenient

channel to transfer money back home in any corner in India.

Through our Overseas Branches

Just walk in to any of our branches in Singapore and Hong- Kong or call

them for assistance.

Through our Accounts with Correspondents

The most convenient way of remitting the money from any part of the

world is a direct credit into UCOBANK Treasury Branch Mumbai

Account with correspondents.

We have correspondent arrangements worldwide. The details of our

accounts in six major currencies are placed on the web for our

convenience. Just send full remittance instructions to our bank for a

direct credit into our Treasury Branch Mumbai Account with

correspondents.

Through Drafts/Cheques

Send our Bank Drafts or Cheques to any of our branches in India with

full particulars of remittance/beneficiary. If you are remitting from

Singapore or Hong Kong, avail the facility of remittance provided by our

overseas branches. UCO, through its worldwide network of

correspondents, Indian branches and overseas branches, offers prompt

inward and outward foreign remittance facilities at very competitive rates.

25


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














The use of SWIFT network adds to reliability and efficient handling. The

remittances are handled by our International Banking

Branches and Authorized Forex Branches. The outward

remittances of customers of other branches are also

remitted through these branches. Through our well-spread

network of branches in India, inward remittances reach

every nook & corner in India. UCO has tie-up

arrangements with Western Union Money Transfer.

VI. FOREX & TREASURY SERVICES

UCO operates in the Forex Market in India as well as abroad. In India the

inter-bank fore operations is centralized at our Integrated Treasury

Branch in Mumbai, country's undisputed financial hub. UCO's

International Banking Branches and Authorized Forex Branches

undertake customer transactions. The fore requirements of customers of

other branches are also routed through these branches. Overseas branches

undertake the fore treasury operations in Singapore and Hong Kong

centre. UCO deals in all the important international currencies. Our Forex

Treasuries generally undertake the following treasury related activities:-

Forex Inter Bank Placements/Borrowings

Sale & Purchase of currency on behalf of customers

Forward Cover Bookings

Cross Currency Swaps

Interest Rate Swaps (IRS)

a) FOREX SERVICES FOR CORPORATES

26














To improve the standard of service to the valued clientele, UCO has

integrated its Forex and Domestic Treasury Operations under one roof in

Mumbai. UCO's Forex Inter-bank desk at Treasury Branch is an active

market player. UCO's integrated operation at one place in Mumbai

enables it to participate in inter-bank transactions on a large scale. Forex

Dealing Rooms in Singapore and Hong Kong and a worldwide network

of correspondents add to UCO's strength in providing the best fore

corporate services. International Banking Branches and Authorized Forex

Branches spread across the country cater to needs of all customers in

foreign exchange. Corporate Forex Services include Foreign Currency

Sale & Purchase, Forward Booking, and Cross Currency Forward etc.

Other products like Collection & Negotiation of Export & Import Bills

under LC, LC Issuance, Advising & Confirmation Services, Arrangement

of Trader Credits, the guarantees on behalf of Indian Corporate/Projects,

EEFC Accounts, and Remittance etc. are all available to corporate

customers from UCO. UCO is establishing a Derivative Desk in India tooffer various Derivative Products, such as IRS, FRA, Cross-currency

Options, and Currency Swaps with Cross-currency Interest Rate Swap

etc. With this UCO will also offer structured products suitable for

Corporate who have large receivables or payment obligation in foreign

currencies. Derivative Desk will deal in hedging products to hedge the

market risks i.e. interest rate risk and foreign exchange risk in Bank's balance sheet.

VII. RESIDENT FOREIGN CURRENCY (RFC)

DEPOSITS:

27








Returning Indians for permanent settlement, after staying abroad for not

less than one year, can

∙ Retain their savings in foreign currency in a RFC account with UCO∙ Get the proceeds of FCNR (B)/NRE Deposits credited to this account

∙ Reparability

Permitted for bonafide purposes for self & dependents including

exchange required for travel, other personal purposes and investments.

∙ Conversion into FCNR (B)/NRE

On becoming an NRI again, customers can transfer these funds into an

FCNR (B) or NRE account.

∙ Choice of Currency

Place the deposit in any of the six international currencies USD, GBP,

Euro, JPY, CAD and AUD.

∙ Remit in any Currency

Customers can remit in any convertible currency. Bank shall convert it in

any of the above six currencies of our choice.

∙ Earn Attractive Interest

28




NON RESIDENT EXTERNAL (NRE) DEPOSITS :

NRE deposits can be placed with us in following a/cuss

Savings Bank A/c – at present interest rate is 3.5%.

Fixed Deposit A/c – at following interest rates

For creation of NRE deposits, remittances from abroad should be made to

us in convertible rupees or in any hard currencies like USD, GBP, EUR

and JPY etc. Above deposits are repatriable in any currency.

NON RESIDENT ORDINAR (NRO) DEPOSITS:

Where an Indian citizen having a resident account leaves India and

becomes non-resident, his resident account should be designated as NRO

account.

Where non-resident Indian receives income in India, he can open a NRO

a/c with such funds.

NRO a/c may also be opened by foreign exchange remitted through

normal banking channels.

All types of a/c like SB, CD and all term deposits as applicable todomestic deposits can be opened Interest rates are as per domestic

deposits. Interest is taxable.

29

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





RUPEE DEPOSITS - HIGHLIGHTS

• Type of Accounts

You can open Savings Bank, Current, Recurring and Fixed Deposit

accounts with us.

• Authorized Branches

For our Indian branches accepting Indian Rupee NRE Deposits, please

get in touch with NRI Relationship Centre at our Head Office or the

respective Regional Offices of our choice.

• Interest Rate

We offer attractive rate of interest on our deposits.

• Remit in any Currency

For NRE accounts we can remit in any convertible currency. We shall

convert it in Indian Rupees.

• Joint Accounts, Power of Attorney, Nomination

NRE Accounts – Same as in case of FCNR (B).

NRO Accounts – Joint accounts with residents permitted, Nomination

facility available.

RESIDENT FOREIGN CURRENCY (DOMESTIC) A/Cs

UCO also offers Resident individuals in India, the facility to open non-

interest bearing current account in foreign currency at the selected Indian

branches as permitted by RBI. A joint account with a resident eligible to

open RFC (D) account is permissible. Nomination facility is also

30







permitted. Thus UCO will provide an option to resident individuals to

retain their receipts from abroad in foreign currency as permitted by RBI.

VIII. CORRESPONDENT BANKING SERVICES

The extensive network of branches in India and presence in two

important international centers enables UCO to offer correspondent

banking services to the banks. The International Banking Branches and

Authorized Forex Branches in India as well as our overseas branches are

capable of providing the services that an international correspondent

Bank can offer.

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.

UCO's excellent service with competitive charges provides a good

Correspondent Banking solution. Co’s overseas branches are active in

discounting of usance international trade bills. With foreign currency

resources of overseas branches, UCO offers the most competitive rates

for discounting of these bills. The bills under the L/Cs of the most of the

31










Indian Banks as well as International Banks are also discounted at

competitive rate.

32




IX. EXTERNAL COMMERCIAL BORROWING

(ECB)

The foreign currency loans to the Indian corporate are granted by UCO's

overseas branches. The borrowings raised by the Indian corporate from

specified banking sources outside India are termed "External Commercial

Borrowings" (ECBs). These ECBs can be raised within the Policy

guidelines of Govt. of India/Reserve Bank of India, as applicable from

time to time. 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.

UCO can offer following services to the Indian corporate in respect of

cross border financing:-

I) Arranging/granting External Commercial Borrowings by way of

Foreign Currency Loans, FRNs, and Bonds for the Indian corporate.

ii) Arranging/underwriting International Syndicated Loans for the Indian

corporate.

iii) Participating in the International Loan Syndications.

iv) Granting loans backed by Export Credit Agencies.

33




CHAPTER NO - 4.

INTERNATIONAL PAYMENT SYSTEM

A payments system is the system of instruments and rules which permits

agents to meet payment obligations and to receive payments owed to

them. As was noted in Chapter 1, banks, as intermediaries, are important

players in the payments system because they are the source of the legal

currency and they facilitate the transfer of funds between agents. Denial

of access to payments can be used as an entry barriers in banking. If the

payments system extends across national boundaries, it becomes a global

concern. Typically, major banks acts as clearing agents not only for

individual customers but also for smaller banks. There is a high degree

of automation in the international banking system.

As “DELIVERY” is the essence of the contract for the importer, timely

and sure receipt of payment is the matter that is of prime interest to

exporter. International transactions have to effect payment from one party

to the other party. There are various ways to effect these payments.

Payments may be gifts or remittances; the key systems are outlined

below:

1. CLEAN PAYAMENTS :-

There is a direct form of settlement between the exporter and bank. The

merchandise is shipped by the exporter and the shipping documents and

invoice are directly forwarded to the overseas buyer. The buyer then

remits the payment . this mode of transacting carries an element of risk

for the exporter, if the foreign buyer defaults to make payment. If the payment remitted in advance, there is an element of risk for the buyer.

34




hence these form of settlement can be used only for small value of

transaction.

2. DOCUMENTARY BILL :-

Under this system the goods are consigned by ship; the shipping

documents and commercial invoice are attached to the demand draft and

send to the overseas banker of the buyer for collection. The documents

are delivering to the buyer against payment at the overseas centre. These

are called D\P Bills. When a L\C can not be established this is the ideal

mode of payment. the exporter can also attach the after sight bill for a

specified no. of days and advise the banker to deliver the bill of lading

and other documents against acceptance of the after sight draft. The

banker will deliver the documents and on the due date of the draft he will

collect the amount and remit to the exporter. This called D\A Bill.

3. BANKERS’ DOCUMENTARY LETTER OF CREDIT(documentary

credit)

Letter of credit established by the banker of the overseas buyer, in favor

of exporter. The letter of credit is advised and generally confirmed by the

local bank in the country of exporter. Normally the l\c is made available

by the overseas buyer while sending is order initially or within a short

time thereafter, and base on the letter of credit, the exporter’s bank may

allow packing credit to the exporter to procure and export the goods. The

l\c safeguards the interest of both and offer the best mode of transacting.

4. CONSIGNMENT TERM:-

35




Under the consignment term the goods are not sold to the buyer but sent

to the agent of the exporter in foreign country. The exporter continues to

own the goods even if the agent in the overseas country remits an

advance payment. The consignment agent arranges to sell the goods at

the foreign country on behalf of the exporter.

RTGS (REAL TIME GROSS SETTLEMENT) PAYMENT

SESTEMS

Settlement in “Real time” means payment transaction is not subjected to

any waiting period. The transaction is settled as soon as processed.

“Gross settlement” means the transaction is settled on the one to one

basis without vouching with any other transaction.

World over the central banks manages RTGS system because the all banks in a country maintain a current account with central bank.

Accordingly, in India it is being managed by RBI.

Society for Worldwide Interbank Financial Telecommunications :-

SWIFT, the Society for Worldwide Interbank Financial

Telecommunications, which was established in Belgium in 1973.

A cooperative company, it is owned by roughly 2000 financial

institutions, including banks, worldwide. The objective of SWIFT is to

meet the data communications and processing needs of the global

financial community. It transmits financial messages, payment orders,

foreign exchange confirmations, and securities deliveries to over 3500

financial institutions on the network, which are located in 88 countries.

36




The network is available 24 hours a day, seven days a week throughout

the year. The messages include a wide range of banking and securities

transactions, including payment orders, foreign exchange transactions,

and securities deliveries. In 1992, the system handled about 1.6 million

messages per business day. Real time and on-line, SWIFT messages pass

through the system instantaneously.

FEDWIRE & Clearing House Interbank Payments System

FEDWIRE and CHIPS: both of these systems are for high value,

dollar payments. FEDWIRE, the Federal Reserve’s Fund Transfer System,

is a real – time gross settlement transfer system for domestic funds,

operated by the Federal Reserve. Deposit – taking institutions that keep

reserves or a clearing account at the Federal Reserve use FEDWIRE to

send or receive payments, which amounts to about 11000 users. In 1992,

there were 68 million FEDWIRE funds transfers, with a value of $199

trillion. The average size of a transaction is $3 million. CHIPS, the

Clearing House Interbank Payments System, is a New York – based private

payments system, operated by the New York Clearing House Association since

1971. CHIPS are an online electronic payments system for the

transmission and processing of international dollars. Unlike FEDWIRE,

there is multilateral netting of payments transactions, and net obligations

are settled at the end of each day. At 1630 hours (Eastern Time), CHIPSinforms each participant of their net position. Those in net deficit must

settle by 1745 hours, so all net obligations are cleared by 1800. Most of

the payments transferred over CHIPS are international interbank

transactions, including dollar payments from foreign exchange

transactions, and Eurodollar placements and returns. It also makes

payments associated with commercial transactions, bank loans, andsecurities. Obligations on other payments or clearing systems can be

37




settled through CHIPS. In 1992, there were 40 million payments, valued

at $240 trillion.

Clearing House Automated Payments System:-

CHAPS : London – based, the Clearing House Automated

Payments System was established in 1984 and permits same – day

sterling transfers. There are 14 CHAPS settlement banks, including the

Bank of England, along with 400 other financial firms which, as sub-

members, can engage in direct CHAP settlements.

The 14 banks are responsible for the activities of sub-members, and

settle on their behalf at the end of each day. The closing time in 1510

hours (GMT). The Bank of England conducts a daily check of the

transfer figures submitted to them. In 1992, the total value of payments

through CHAPS was $20 928 billion, equivalent to a turnover of British

GDP every seven days. There are other payments systems in the UK;

CHAPS is for high-value, same-day sterling transfers. CHAPS accounts

for just over half the transfers in the UK payments system; the average

daily values transferred through the UK system were $161 billion in

1993. A framework for introducing real time gross settlement was drawn

up in 1993. It will mean transactions across settlement accounts at the

Bank of England will be settled in “real – time”, rather than at the end of

each day. A number of the large global banks run their own electronic

payments systems, primarily to facilitate internal global payments. These

systems are run alongside SWIFT and other public systems. The internal

systems are also used to attract corporate business.

CHAPTER NO- 5.

OFFSHORE BANKING CENTERS

38




INTRODUCTION:-

Offshore finance is, at its simplest, the provision of financial services by

banks and other agents to non-residents. The services include the

borrowing of money from non-resident and lending to non residents. This

can take the form of lending to corporate and other financial institutions,

funded by liabilities to offices of the lending bank elsewhere, or market

participants.

OFFSHORE FINANCIAL CENTERS:-

Offshore financial center (OFC) usually refers to law -tax, lightly

regulated jurisdiction which specializes in providing the corporate and

commercial infrastructure to facilities the use of that jurisdiction for the

formation of offshore companies. The IMF considers the following to be

characteristics of an off shore financial centers:

Jurisdiction that have relatively large number of financial

institution engaged primarily in business with non-resident,

Financial systems with external assets and liabilities out

proportion to domestics financial intermediation designed to

finance domestic economies ; and

Center which provide some or all of the following services:

low or zero taxation; moderate or light financial regulation;

banking secrecy and anonymity.

39




OFFSHORE BANKING:-

An offshore bank is a bank located outside the country residence of

the depositor, typically in a low tax jurisdiction that provides financial

and legal advantages. The advantages typically include some or all

of:-

Strong privacy

Less restrictive legal regulation

Low or no taxation (i.e. tax havens)

Easy access to deposits (at least in terms of regulation)

Protection against local political or financial instability

MERITS OF OFFSHORE BANKING:-

1. Offshore banking provides access to politically and economically

stable jurisdictions. This may be an advantage for those residents in

the areas where there is a risk of political turmoil, who fear their

assets may be frozen, seized or disappear.

2. Some offshore banks may operate with lower cost base and can

provide higher interest rates than the legal rate in the home country

due to lower overheads and a lack of government intervention.

3. Interest is generally paid by offshore banks without tax deducted.

This is advantages to individuals who do not pay tax on worldwide

income, or who do not pay tax until the tax return is agreed, or who

feel that they can illegally evade tax by hiding the interest income.

40




DEMERITS OF OFFSHORE BANKING:-

1. Offshore banking has been associated with the underground

economy and organized crime, through money laundering.

Following September 11, 2001, offshore banks and tax havens,

along with clearing houses, have been accused of helping various

organized crime gangs, terrorist groups, and other state or non-state

actors.

2. The existence of offshore banking encourages tax evasion, by

providing tax evaders with an attractive place to deposits their

hidden income.

3. Developing countries can suffer due to the speed at which money

can be transferred in and out of their economy.

4. Offshore banking is usually more accessible to those on higher

incomes, because of the establishing and maintaining offshore

accounts.

OFFSHORE BANKING IN INDIA:-

Beginning of offshore banking in India is by permitting for the first

time offshore banking units (OBUs) to be set up in special economic

zones (SEZs).

∗ SEZs will be deemed to be a foreign territory for the purpose of

trade operations and duties\tariffs so as to trigger exported growth

of the economy.

∗ The OBUs would be treated as foreign branches of Indian banks

located in.

41




∗ These OBUs would be exempt from reserve requirements and

provide access to SEZ units and SEZ developers to international

finances at international rates. The reserve bank of (RBI) has

permitted banks operating in to set up OBUS in the SEZs.

∗ The OBUS would carry out mainly wholesale banking operations.

∗ The OBUS will be regulated and supervised by RBI. OBUS in

have a limited mandate.

State bank of and icecap bank have opened the first offshore banking units in at the seeps special economic zone, Mumbai.

ABOUT GRIFFON BANK

Private Banking with the Personal Touch

Griffon Bank Limited is a private offshore bank chartered in the

Commonwealth of Dominica, West Indies. Dominica is an independent

English speaking country located between the French islands of

Guadeloupe and Martinique. Griffon Bank Limited was established and

licensed in 1997 under Offshore Banking Act 1996. We provide banking

services to our customers worldwide in a protected environment

supervised by the Government of Dominica and Eastern Caribbean

Central Bank.

42

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Our international staff from multicultural backgrounds is here to

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HISTORY

Griffon Bank Limited was established in the Commonwealth of

Dominica in 1997 by the group of businessman under the Offshore

Banking Act 1996. In the same year bank received the Class A

(unrestricted) bank license. In 2001 after receiving the approval by the

Government of Dominica Griffon Bank Limited was taken over by the

new shareholder and new Board of Directors have been elected. In

January 2002 Griffon Bank Limited has successfully launched state-of-

the-art secure Internet Banking services which proved to be reliable and

user friendly up to date. In March 2002 Griffon Bank Limited has

launched its website French, English, Spanish and Mandarin. In May

2004 Griffon Bank Limited has moved its offices into the most modern

office building in Dominica - the Financial Center. This building is

equipped with standby generator facility, backup high bandwidth Internet

line, modern fire alarm and security systems and is occupied as well by

the Prime-Minister and Ministry of Finance of the Government of

Dominica, OECS, representative office of the Eastern Caribbean Central

Bank, cellular communication provider Orange and other prime

organizations and companies. Griffon Bank Limited is currently

undergoing major development of its operations in order to improve and

43

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Griffon Bank offers wealthy clients with high expectations all the

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accounts and a wide range of investment products and investment

opportunities, we develop a long term partnership based on mutual trust

to secure, protect and increase our capital. Benefit from the exclusive

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Griffon Bank satisfies our most demanding international banking needs.

44

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BALANCE SHEET OF BANKS:-

A bank’s balance sheet is different from that of a typical company

balance sheet. Regular items such as inventory, accounts receivables

or accounts payable are of little significance in case of banks. Under

the assets side banks have mostly the loans and investments, and under

the liabilities side, deposits and borrowing.

Let’s take a closer look at the balance sheet of hypothetical bank :-

31/12/2006 %of assets

Assets

Cash

securities

loans

other assets

Total assets

50

500

1,500

200

2,250

2%

22%

67%

9%

100%

Liabilities & equity

Deposits

Borrowings

Shareholder’s equity

1,400

600

250

62%

27%

11%

Total liabilities and equity 2,250 1%00

45




CHAPTER NO- 6.

MULTINATIONALIZATION OF BANKS

To complete the theoretical picture of global banking, the second

question should be addressed – that is, why do banks set up branches or

subsidiaries and therefore become multinational banks? The question is

best answered by drawing on the theory of the determinants of the

multinational enterprise. A multinational enterprise (MNE) is normally

defined as any firm with plants extending across national boundaries.

Modifying this definition for banking, a bank with cross – border

branches or subsidiaries is a multinational bank. It is important to stress

from the outset that location efficiency conditions in a given country are

necessary, but not sufficient to explain the existence of MNEs.

Location efficiency refers to the choice of a plant location –

comparatively, there is an advantage in being the lowest cost producer of

a good or service. However, to explain the existence of the MNE, other

factors are at work – otherwise, one would observe a domestically

domiciled firm producing and exporting the good or service. Thus, one

has to look beyond location efficiency to explain why a plant is owned by

non-resident shareholders. There are two important reasons why an MNE

rather than a domestic form produces and exports a good or service.

Barriers to free trade, due to government policy or monopoly power in

supply markets, are the first explanation for the existence of MNEs. For

example, Japanese manufacturers have set up European subsidiaries,

hoping to escape some of the harsh European trade barriers on the import

of Japanese manufactured goods. The second is imperfections in the

market place, often in the form of a knowledge advantage possessed by a

46




certain type of firm which cannot be easily traded. American fast food

conglomerates have been very successful in global expansion through

franchises, which profit from managerial and food know-how originally

developed in the USA. The same framework can be applied to explain

the presence of multinational banks (MNBs). Banks may opt to set up

branches or subsidiaries overseas because of barriers to free trade and / or

market imperfections.

For example, US regulations in the 1960s effectively stopped foreigners

from issuing bonds in the USA and American companies from using

dollars to finance foreign direct investment. US banks got round these

restrictions by using their overseas branches, especially in London,

because it was a key centre for global finance. Later, these banks used

their London subsidiaries to offer clients investment banking services,

prohibited under US law. Additionally, the nature of banking means

banks possess a number of intangible assts which cannot be traded in the

market place.

For example, a bank may wish to profit from the employment of superior

management skills in a foreign country, provided location efficiency

conditions are met. Thus, US banks with management expertise in

securitization may transfer these experts to their London subsidiaries, as

the securitization may transfer these experts to their London subsidiaries,

as the securitization business in Europe grows. Japanese banks have

established subsidiaries in London and New York, where the markets are

subject to fewer regulations than in Japan. This move was partly

motivated by a belief that experience gained in other markets would give

bankers a competitive edge in the event that Japanese financial markets

are deregulated. Reputation is an important intangible asset possessed

by banks. Many of the London merchant banks have established offices

47




in other countries, to exploit their reputation for expertise in corporate

finance, and other investment banking services. It is not possible to sell

reputation on an open market. Provided location efficiency conditions

are met, reputation may be a profitable reason for a bank expanding

across national borders. Many authors (for example, Callback, 1984)

have argued that MNBs exist because banks need to follow their

corporate customers overseas. The theory outlined above is not

inconsistent with this traditional explanation. Suppose the customer of a

bank decides to set up a subsidiary in a foreign country.

Additionally, the bank may follow the corporate customer overseas to

protect its own assets. If the bank is going to lend funds to a

multinational firm, it will require information on the foreign operations to

properly assess the creditworthiness of the client. The optimal way of

gathering information may be the establishment of a branch or subsidiary

in the foreign country. Effectively, the bank internalizes the implicit

market for this information. To summaries, the term international banking

should be defined to include two different activities: trade in international

banking services, consistent with the traditional theory of competitive

advantage for why firm’s trade, and MNBs, consistent with the economic

determinants of the multinational enterprise.

48




MULTINATIONAL BANKING

Historical Background

Multinational banks (MNBs) are banks with subsidiaries, branches,

or representative offices which spread across national boundaries. They

are in no way unique to the post – war period. For example, from the

13the to 16th centuries, the merchant banks of the Medici and the Fugger

families had branches located throughout Europe, to finance foreign

trade. In the 19th centuries, MNBs were associated with the colonial

powers, including Britain and, later on, Belgium, Germany and Japan.The well – known colonial MNBs include the Hong Kong and Shanghai

Banking Corporation (HSBC), founded in 1865 by business interests in

Hong Kong specializing in the “China trade” of tea, opium and silk.

Silver was the medium of exchange. By the 1870s, branches of the bank

had been established throughout the Pacific basin. In 1992, the colonial

tables were turned when HSBC acquired one of Britain’s major clearing banks, the Midland Bank. The National Bank of India was founded in

1863, to finance India’s export and import trade. Branches could be

found in a number of countries trading with India. The Standard Bank

was established in 1853 specializing in the South African wool trade.

Headquartered in London, it soon expanded its activities to new

developments in South Africa and Africa in general. Presently it is

known as the Standard Chartered Bank, and though it has a London head

office, the bank does virtually no domestic business in the UK. By 1914,

the Deutsche Bank had outlets around the world, and German banks had

53 branches in Latin America. The Societe General de Belgium had

branches in the Belgian African colonies, and the Mitsui Bank established

branches in Japanese colonies such as Korea. All of these banks were

“colonial” commercial banks because their primary function was to

49




finance trade between the colonies and the mother country. Branches

were normally subject to tight control by head office. Their

establishment is consistent with the economic determinants of the MNE,

discussed earlier. Branches meant banks could be better informed about

their borrowers engaged in colonial trade. Since most colonies lacked a

banking system, the home country banks’ foreign branches met the

demand for banking services among their colonial customers. A number

of multinational merchant (or investment) banks were established in the

19th century – good examples are Barings (1762) and Rothschild’s (1804).

They specialized in raising funds for specific project finance. Rather than

making loans, project finance was arranged and stock was sold to

individual investors. The head office or branch in London used the

sterling interbank and capital markets to fund the project finance these

banks were engaged in. Capital importing countries included Turkey,

Egypt, Italy, Spain, Sweden, Russia, and the Latin American countries.

Development offices associated with the bank were located in the foreigncountry. Multinational merchant banks are also consistent with the

economic determinants of the MNE. Their expertise lay in the finance of

investment projects in capital poor countries; this expertise was acquired

through knowledge of the potential of the capital importing country

(hence the location of the development offices) and by being close to the

source of supply, the London financial markets. There was rapidexpansion of American banks overseas after the First World War.

In 1916 banks headquartered in the USA had 26 foreign branches

and offices, rising to 121 by 1920, 81 of which belonged to five US

banking corporations. These banks were established for the same

purpose as the 19th century commercial banks, to finance the US

international trade and foreign direct investment of US corporations,

50




especially in Latin America. In the 1920s, these banks expanded to

Europe, in particular Germany and Austria. By 1931, 40% of all US

short – term claims on foreigners were German. A few American and

British banks established branches early in the 20 th century, but the rapid

growth of MNBs took place from the mid – 1960s onward. Davis (1983)

argued that in this period banks moved from a “passive” international

role, where they operated foreign departments, to one where they became

“truly international” by assuming overseas risks. However, such an

argument makes ambiguous the distinction between the MNB aspect of

international banks and trade in international banking services. As

expected, the key OECD countries, including the USA, UK, Japan,

France, and Germany, have a major presence in international banking.

51




A partnership-based programmed

The Foreign Policy Centre is working with a number of leading Indian

think tanks and other partners in various fields, including:

Indian investors in Europe

UK investors in India

Prominent journalists, academics and opinion formers

Indian Diaspora organizations in Europe, especially the UK

NGOs, think tanks and research organizations

Aims and context

India’s influence on global affairs is evident in a number of spheres –

from academia and development theory to business, technology and

movies. As suggested by the Goldman Sachs report, dreaming With

BRICs: The Path to 2050, the economies of Brazil, Russia, India and

China (BRIC) together could be larger than the G8 in dollar terms in

fewer than 40 years.

Two issues will inevitably shape India’s rise.

1. India’s projected economic power will mean that it will be a strong

force in determining international market practices and influencing

decisions in the multilateral trading system.

2. As the largest democracy in the world, India enjoys unique

political legitimacy which means that it is held up as a role model

and a progressive influence in global affairs. In the words of Sunil

Khilnani, India needs to “make use of the ‘democratic dividend’…

and be willing to play a role in the global ‘battle of ideas’”. Most

analysts agree that India has yet to find a voice in world affairs

53




appropriate to its power and potential and that India’s role on the

world stage remain unclear. In the short term, key questions

remain about how it relates to the West and other emerging

powers, especially China. More long term, India has yet to stake

out its position as a progressive international player, a positive

broker in the pursuit of multilateral solutions to global problems

and an active player in the promotion of liberal democracy around

the world.Through an interchange between small groups from

India, Europe, the US and selected other countries, the Foreign

Policy Centre’s programmed will explore how India will engage

with the world over the first decades of the 21st century. It will

aim to address clear questions about India’s future.

How is globalization shaping India’s worldview and sense of itself?

How will India look to shape its own global role?

How will India’s new role impact on the international system?

The programmed will examine a variety of cutting edge issues and newideas.

Focusing On Five Areas:

International political values, multilateralism and international

security

Evolving international economic configuration, trade and finance

Democracy, pluralism and harnessing variety

Technology, entrepreneurship, competitiveness, corporate governance

and the knowledge revolution.

The Foreign Policy Centre will be launching four main sets of activities:

54




High level forums in London, Brussels and New Delhi engaging

senior participants from business, government and academic

Publication of policy reports and papers from Indian authors under

the rubric ‘New Thinking from India’

Publication of policy reports and papers from international observers

(business, government, journalisms and academics) on the various

Indian perceptions of their country’s place in the world.

Associated public forums, newspaper articles and public Lecture

GLOBAL INTEGRATION IN THE BANKING

INDUSTRY

Many observers believe that significant global integration is under way in

the banking industry and that, in the coming years, individual banks will

expand their reach into many countries. Likewise, these observers expectthat many national banking markets will develop large foreign

components; as that happens, the nationality of a bank in such market will

matter little to prospective customers.

i) These forecasts are based on the observation that, over the past two

or three decades, many nations have removed important regulatory

barriers to international banking. Advances in technology also now

allow financial institutions to manage larger information flows

across more locations and to evaluate and manage risks at lower

costs than ever before.

Together, these developments have reduced the costs of supplying

banking services across borders. At the same time, growth in the

international activities and trade of multinational corporations has

55




increased the demand for services from financial institutions that operate

across borders. Despite these developments, the banking industry appears

today to be far from globally integrated, particularly in industrialized

countries.

For example, the foreign share of bank assets in most industrialized

countries remains at or below 10 percent. And although bank

consolidation has been intense within industrialized countries, mergers

and acquisitions across the borders of these countries have been much

less common

ii) To evaluate more closely the extent to which banking is becoming

globally integrated, we study the nationality and international reach

of banks that provide financial services across Europe to affiliates

of multinational corporations. We examine these affiliates because

they are among the customers most likely to demand the services

of international banks, and we focus on Europe because barriers tofinancial integration have been extensively reduced on that

continent. A finding that banking integration has advanced little

even under such favorable conditions would cast doubt on the

prospects for the globalization of banking more generally.

The 1996 survey of the short-term banking practices of more than 2,000

European affiliates of multinational corporations. Perhaps surprisingly,

we find that close to two-thirds of these affiliates choose a bank

headquartered in the nation in which they are operating (a host-nation

bank) rather than a bank from their home country or a third nation.

Moreover, having chosen a host-nation bank, an affiliate is more likely to

select a bank limited to local or regional operations rather than a large

bank with global reach. The time-series data that might reveal the degree

56




to which global integration has increased over the past decade. These data

cover European syndicated loans, the ratio of domestic private bank

claims to total (domestic plus foreign) bank claims, and the dispersion of

nonfinancial goods prices across Europe. In brief, the time-series data

show a picture for the current period that is not substantially different

from that at the time of the 1996 survey. These results are consistent with

the idea that affiliates Value host-nation banks over others because host-

nation banks better understand their own market and may possess

superior information about local nonfinancial suppliers and customers.

The results also imply that affiliates that have chosen host-nation banks

value the more customized and relationship based services offered by

banks with local or regional reach, as opposed to the broad-based services

offered by a host-nation bank that has global reach.

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CHAPTER NO – 8.

RECENT TREND IN INTERNATIONAL BANKING

RECENT DEVELOPMENT IN GLOBAL BANKING

Banking crises in emerging markets in the 1990s were associated with

major macroeconomic disruptions: sharp increases in interest rates, large

currency depreciations, output collapses and lasting declines in the supply

of credit. Bank credit has since recovered in a number of countries, and

there have been significant changes in banking structure, performance

and risk management capacity. Drawing on contributions by senior

central bank officials from emerging market economies and staff of the

Bank for International Settlements, the volume seeks to shed light on

recent developments by addressing five broad topics.

1. Recent trends in bank credit

After peaking in the second half of the 1990s, bank credit to the private

sector has recently risen in a number of emerging market economies,

partly because of stronger demand for loans associated with robust

growth and low interest rates, and partly because of greater supply of

loans associated with improved bank balance sheets. The share of bank

credit to the business sector has nonetheless declined in part because

lagging investment spending has curbed corporate loan demand, and also

because of the availability of financing in bond and equity markets. In

some countries risk averse banks have held government securities rather

than lend to the corporate private sector. Financial institutions have

increased lending to households but this exposes them to new forms of

risk, as illustrated by difficulties in the credit sector in Korea earlier in

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this decade. One concern is that banks in some countries have transferred

a significant amount of interest rate or exchange rate risk to households

through floating rate credit or loans denominated in foreign currency.

2. The pace of structural change

Banking systems in emerging economies have been transformed by

privatization, consolidation and foreign bank entry. Bank efficiency and

performance have improved, apparently in response to a more

competitive climate. More recently, reforms appear to have slowed, in

part because the easy work had been done and because of alternative

approaches to reform. For example, rather than engaging in full scale

privatization, countries like China and India are only gradually

transferring ownership of major state-owned banks to the private sector.

As for bank consolidation, it has been market-driven and foreign banks

have played an important role in central and eastern Europe and Mexico,

while the state has played a larger role in Asia. Increased concentration

was not seen as a threat to competition and access to bank financing had

improved with the growing presence of foreign banks. However foreign

banks raised political concerns because of perceived high profits and

were also difficult to supervise because parent banks' global goals and

information flows did not always coincide with the needs of host country

supervisors.

3. Evolution in and management of risks facing banks

Macroeconomic vulnerabilities (particularly to external shocks) appear to

have declined, reflecting a mix of favorable temporary conditions as well

as improved policies (higher foreign reserves, more flexible exchange

rates, domestic debt market development and improved fiscal policies).

59




However, some central banks were still concerned about vulnerability to

certain shocks (eg. to domestic demand, to increases in oil prices or

interest rates or declines in property prices), particularly given the

exposure of banks to interest rate or exchange rate risk and the need in

some countries for further fiscal consolidation. Banks increasingly relied

on systematic risk assessment procedures and quantitative risk

management techniques, with lending being influenced less by

government direction or special bank relationships with borrowers.

However, challenges still arose from lack of data on loan histories for

estimating default probabilities, and risks related to liquidity and credit

risk transfer.

4. Preventing systemic banking crises

One indicator of stronger banking systems is that the volatility of output

and inflation has fallen in emerging market economies while their capital

ratios have risen significantly. This reflects (i) policies designed to

improve bank governance and information disclosure that enhances

market discipline, (ii) regulatory measures to dilute risk concentration,

limit connected lending, establish realistic provisioning rules and to

improve inspection process; (iii) the evolution in supervisory strategy

from "ratio watching" (checking bank positions against predetermined

prudential ratios) to examining the bank's risk management process. Theability to take early action to deal with incipient problems before a crisis

develops has also been enhanced by increased authority, independence

and legal protection for supervisors. At the same time, explicit and

limited deposit insurance has helped make clear that not all bank deposits

are guaranteed by the government. The payment of fixed premia have

encouraged banks to monitor the strictness/effectiveness of supervisoryauthority and ensured weak banks share the burden of any payouts. Some

60




of these improvements have been helped by efforts to adopt international

standards for best practice (Basel Core Principles for Effective Banking

Supervision, Basel I and Basel II) and outside assessments of financial

stability (i.e. Financial Sector Assessment Programs, or FSAPs).

Challenges remain, including changing the culture in supervisory

agencies as well as audit departments of banks towards more effective

risk management, and the lack of adequately trained staff.

5. Changing financial intermediation: implications for monetary

policy

Bank deregulation and global integration has on the one hand made

monetary policy in emerging markets more potent by allowing a wider

range of transmission channels, including asset market and exchange rate

channels. Domestic bank loan rates also appear to be more responsive to

changes in money market rates in countries with profit-driven banking

systems, perhaps reflecting the recovery in the health in banking systems

(pass through is lower in countries with weak bank systems eg. post

1997-1998 crisis). On the other hand, external factors unrelated to

monetary policy have also shaped bank behavior. For example, demand

for bank deposits has depended on exchange rate expectations. Global

integration had also led to some convergence in long-term interest rates.

“Indian banking – global benchmarks”. Today it is “Global banking

– paradigm shift”. This subtle change of emphasis in themes – from

Indian banking to global banking – clearly reflects today’s reality:

the increasing globalization of the Indian economy.

Over the past decade, India has emerged as one of the fastest-growing

economies on the globe. The rest of the world has been impressed to see

61




that the reforms initiated in the early 1990s are bearing fruit. To sustain

any country’s growth, of course, a strong and dynamic financial sector is

essential.

What can governments and central banks do to nurture a more efficient

and competitive financial industry and at the same time maintain the

stability of the system as a whole? This question is central to the

international deliberations on financial policy that take place at the Bank

for International Settlements.

The BIS and its various committees of experts play a major role inshaping the policies, standards and so on that help to ensure global

financial stability. There are a few of the important committees and

groups. One is the Committee on the Global Financial System (CGFS).

This Committee regularly monitors the latest developments in financial

markets worldwide, and also investigates how structural changes affect

the working of the global financial system. Representatives of theReserve Bank of India are active participants in the work of the CGFS.

Another key committee is the Basel Committee on Banking Supervision,

with which many of you will be familiar. The Basel Committee

formulates broad supervisory standards and recommends guidelines for

sound practices in the areas of banking system supervision and

regulation. The Basel Committee does not enforce compliance with the

standards it issues. Rather, the expectation is that national authorities will

take steps to put in place the necessary arrangements, statutory or

otherwise, that are best suited to their own national systems. The BIS

Financial Stability Institute (FSI) helps financial sector supervisors to

implement these standards and so strengthen their financial systems. A

large number of conferences, high-level meetings and seminars are held

by the FSI in Basel as well as in different regions around the world. The

62




FSI also offers an online learning tool – FSI Connect – that is helping to

train banking supervisors in some 95 jurisdictions around the world. The

FSI and the BIS generally have deepened their contacts with the financial

industry in recent years. The Basel II process provides one recent obvious

instance. This revision of banks’ capital adequacy requirements was

undertaken over a period in which consultation with the private sector –

throughout the world, not just in the main financial centers – was intense

and continuous. The three themes related to the interface between the

financial markets and various elements of the regulatory framework that I

believe are relevant to global banking today.

The first theme is: market forces and the rationale of Basel II . Because

global market forces are increasingly shaping the structures of national

banking systems, supervision needs to be conducted in ways that harness

market discipline.

The second is:

the importance of market contestability . Technologicaldevelopments and international agreements on financial services are

making financial markets ever more contestable.

The third is: that effective market discipline depends on the

harmonization of standards . Global integration is creating a need for

some degree of harmonization in this area.

(i) Market forces and the rationale of Basel II

Technology, deregulation and liberalization have reinforced market

competition, locally and internationally. Banks now have significant

operations beyond their domestic borders and are handling a large

amount of business and millions of non-resident clients across the globe.

In the process, large, internationally active financial institutions with

63




complex risk profiles have grown in size. Other domestic banks and

institutions are also forging stronger cross-border linkages by acquiring

customers abroad. Three related changes have also been important.

One: In the past, it was frequently the regulators who directly limited

banks’ business and risk-taking and – very often – shielded banks from

competition. Now banks across various jurisdictions are able to take most

of their own decisions – and face the consequences. They also have to

withstand more competition. These developments have inevitably

focused the minds of senior bank managements on the significance of

managing risks.

Two: The economic context in which banks operate has changed. There

is an increasing emphasis on “shareholder value”, which leads banks to

focus on improving risk-adjusted profitability, rather than simply

boosting business volumes. Banks are more aware of risks in their

business and of the need to use their scarce capital resources effectively.

They constantly develop and seek to improve sophisticated tools for

assessing, monitoring and managing risks.

Three: Banks now face increased competition from the alternative

sources of finance that open capital markets provide. At the same time,

various capital market instruments are now available to banks that can

help them to manage their risk profiles in a more flexible manner. Banks

not only need to price their products based on a better assessment of

risks, but they also need to really understand the advanced products that

are available to mitigate or manage risks. The importance of market

discipline brings the second theme:

(i) The importance of market contestability

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Technology and international agreements on financial services have

already made global banking a reality in many countries, and are

increasingly doing so in many others. This means that countries need to

ensure that their banking and financial markets can adapt to a more

competitive environment. The “contestability”, or “competition-

friendliness”, of a market is the key issue here. The degree of

contestability varies directly with how easy it is for new firms to enter the

market. Increased competition enables the provision of a broader range of

services, reduces price distortions and cuts costs for firms and

households. It also helps to transfer new technology and skills into the

market, as well as new products and management techniques, which

improve the overall efficiency of the market. Contestability has various

dimensions The partial privatization of public sector banks in India –

involving a substantial injection of private shareholding – has been a

notable step forward. So too has the establishment of 12 new private

sector banks since 1993. Foreign direct investment (FDI) in the financialsector is also very important. A recent comprehensive report by the

CGFS found that local banks’ exposure to global competition boosted the

efficiency of the local financial sector in a lasting way. Competition from

foreign firms forces local banks to reassess their lending practices. The

result has often been better risk management1 and more diversified

lending portfolios – and hence safer banks. The steps taken by India inrecent years to allow greater FDI in domestic private sector banks and to

permit the establishment of foreign banking subsidiaries in India are

therefore to be welcomed. It needs to be recognized, however, that

managing foreign bank involvement in the domestic financial system is a

challenge. BIS workshops held in Asia, Latin America and eastern

Europe brought to light several important # dilemmas that policymakers

face.2 A common theme of these workshops was that good

65

http://www.bis.org/speeches/sp051005.htm#P52_10494%23P52_10494







communication between home and host country authorities in charge of

financial sector oversight was essential.

(ii) Harmonization of standards

The three themes: that effective market discipline depends on the

harmonization of standards. As barriers to the establishment of foreign

banks and to the cross-border provision of financial services come down,

increased attention is being given to the harmonization of accounting

standards and arrangements across countries. This is not a goal that is

easily attained. The fundamental challenge is to find sufficient common

ground for an international framework that promotes broadly consistent

results – or a “level playing field” – in the face of the very real

differences that exist across countries in terms of legal systems, market

practices and business conditions. Finding such common ground

invariably involves compromise, which means that the result is unlikely

to be that which a country acting on its own would have adopted. The

process of harmonization of accounting standards began several years ago

and is being coordinated by the International Accounting Standards

Board (IASB). A number of international financial reporting standards

(IFRS) have been finalized and have been applicable to all listed

companies in the European Union since 1 January 2005. Several other

countries have also adopted IFRS as their national accounting standards.It is estimated that more than 90 countries will either permit or require the

use of IFRS before or during 2007 for publicly traded companies. In

addition, a number of other countries are putting in place a formal policy

to bring their national standards into line with IFRS. The Securities and

Exchange Commission of the United States has also expressed strong

support for convergence between IFRS and the United States’ GenerallyAccepted Accounting Principles (US GAAP). The Financial Accounting

66




Standards Board (FASB) of the US and the IASB are now working

towards finding common ground between IFRS and US GAAP. Many

of the Indian commercial banks currently prepare their statements under

US GAAP, in addition to adhering to Indian accounting standards.

Convergence between Indian and international accounting standards has

been adopted as a formal policy of the Institute of Chartered Accountants

of India. Moreover, India has been involved in the Standards Advisory

Council of the IASB, which meets periodically to inform and advise the

IASB on various issues relating to accounting standards. All this is

welcome. Adopting common financial reporting should be a major step

towards improving the efficiency of international financial markets. It

will reduce barriers to both trade and the flow of capital. Investors will

have access to more reliable financial data to assess corporate

performance in many jurisdictions. As issuers of securities, companies

will be able to attract investors more easily, potentially reduce their cost

of capital, and save the costs of having to conform to many differentrequirements in different jurisdictions. Audit firms will be better able to

assure the quality of audits among national partner firms. Financial sector

supervisors and regulators will benefit from the greater consistency and

quality of information. Ultimately, the adoption of such common

standards will lead to increased opportunities for global investment, and

will boost employment and growth globally. Not surprisingly, then, thereis growing momentum in the adoption of IFRS across jurisdictions.

Summarizing three main issues. First, global banking is becoming a

reality in more and more countries.

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CHAPTER NO - 9.

CASE STUDY WITH SBI

CASE STUDY WITH SBI

International Banking services of State Bank of India are delivered for the

benefit of its Indian customers, non-resident Indians, foreign entities and

banks through a network of 67 offices/branches in 29 countries, spread

over all time zones. The network is augmented by a cluster of Overseas

and NRI branches within India and correspondent links with over 522

banks, the world over. Bank's Joint Ventures and Subsidiaries abroad

further underline the Bank's international presence. The Bank has carveda niche for itself in the Euro land with branches located in Antwerp, Paris

and Frankfurt. Indian banks and corporate are able to avail single-window

Euro services from the Bank's Frankfurt branch. These services include:-

A. TRADE FINANCE

Trade finance includes gamut of services which include credit for both pre shipment and post shipment activities. These primarily include:-

Export Avenue

Rupee Export Credit (Pre-Shipment and Post-Shipment)

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PRE-SHIPMENT EXPORT CREDIT:-

Pre- Shipment credit (Packing Credit) is extended to the exporters for

financing purchase, processing, manufacturing or packing of goods prior to shipment. This would mean any loan or advance can be extended by

SBI on the basis of:

a) Letter of Credit opened in the favor of the customer or in favor of

some other person, by an overseas buyer

b) A confirmed and irrevocable order for the export of goods from India.

c) Any other evidence of an order or export from India having been

placed on the exporter or some other person, unless lodgment of export

order or Letter of Credit with the bank has been waived.

Packing Credit is granted for a period depending upon the circumstances

of the individual case, such as the time required for procuring,manufacturing or processing (where necessary) and shipping the relative

goods. Packing credit is released in one lump sum or in stages, as per the

requirement for executing the orders/LC. The pre-shipment / packing

credit granted has to be liquidated out of the proceeds of the bill dawn for

the exported commodities, once the bill is purchased/discounted etc.,

thereby converting pre-shipment credit into post-shipment credit.

POST-SHIPMENT EXPORT CREDIT:-

SBI extend Post-shipment Credit that is any loan / advance granted or any

other credit provided by SBI for purposes such as export of goods from

India. It runs from the date of extending credit, after shipment of goods

to the date of realization of export proceeds and includes any loan /

advance granted on the security of any duty drawback allowed by the

69




Govt. from time to time. Post-shipment credit has to be liquidated by the

proceeds of export bills received from abroad in respect of goods

exported.

The exporter has the following options at post-shipment stage:

i. To get export bills purchased /discounted / negotiated;

ii. To get advances against bills for collection;

iii. To receive advances against duty drawback receivable from Govt.

The exporter has the option to avail of pre-shipment and post-shipment

credit either in rupee or in foreign currency. However, if the pre-shipment

credit has been availed in foreign currency, the post-shipment credit has

necessarily to be under EBR Scheme since foreign currency pre-shipment

credit has to be liquidated in foreign currency.

Pre Shipment Credit in Foreign Currency (PCFC)

SBI‘s Pre-shipment Credit in Foreign Currency (PCFC) facilitates funds

in foreign currency. SBI’s PCFC gives the choice of four different

currencies in which to operate the scheme - the US Dollar, Pound

Sterling, Euro and the Japanese Yen. SBI has 64 branches across the

country handling the PCFC facility for the customers’ exclusive

convenience. The Bank’s Foreign Department, based at Calcutta, is the

nodal centre for raising and deploying offshore and onshore funds for

lending under PCFC.

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How do the schemes operate?

PCFC & EBR schemes go hand in hand. The operation of these schemesis in three stages, viz.

i) Disbursement of PCFC

ii) Disbursement of EBR and simultaneous repayment of PCFC and

iii) Repayment of EBR.

When the exporter has sufficient drawing power available within his

overall limit to accommodate the proposed PCFC advance, PCFC is made

available to him either in foreign currency for payment of his import bills

or in Indian rupees for purchase of domestic raw material by converting

the foreign currency of PCFC at T.T. Buying rate. PCFC is operated like

cash credit account with balances in foreign currency. The liability of the

exporter to the Bank on account of PCFC is in foreign currency. The

rupee equivalent will be shown in the account only at notional rates

which really doesn't concern the exporter. Interest on PCFC will bearrived in foreign currency and the rupee equivalent thereof will be

recovered at quarterly intervals from the exporter's CC or Current

account.

Export Bill Rediscounting

The EBR advance which is a foreign currency loan will be eventually

closed when the overseas buyer pays the bill and the export proceeds are

realized.

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LETTER OF CREDIT

SBI offers Letters of Credit to facilitate purchase of goods in international

trading operations. The bank's vast network of branches andcorrespondent banks enables one’s enterprise to sustain a seamless flow

of business on a wide platform. Further, the bank's informed trade finance

crew can provide with sophisticated credit and trade information, and

market knowledge, helping to extract more value from business. Since

the Bank establishing the Letter of Credit undertakes the responsibility of

honoring the drafts drawn there under, the ability of the importer to meet

its obligation, the integrity of the exporter, the nature of goods, besides

observance of Exchange Control regulations etc. are considered.

IMPORT AVENUE

• Foreign Currency import credit

This facility is ideal for both Indian importers and their foreign suppliers.

SBI offers credit to foreign suppliers of Indian importers by purchasing

the import bill for its full value through one of the bank's overseas

offices. The tenor of this form of supplier's credit does not exceed 180

days. The supplier gets 100 per cent of the invoice value immediately,

making his deal practically a cash sale. Importers get credit for a

maximum period of 180 days, enabling them to manage their liquidity

better. Further, their interest payables could be lower since international

interest rates are currently lower than domestic rates. These facilities are

useful for import by sellers in the domestic market as well as export-

related import.

72




• Supplier's credit

Suppliers' Credit essentially represents credit sales affected by the

supplier on the basis of accepted bills or promissory notes with or withouta collateral security. Any credit facility arranged with recourse to the

supplier for financing upto 180 days import into India which is not

backed up in the form of any letter/document/guarantee/agreement, etc.

issued by the LC opening banks or in any other manner except normal

routine commercial transactions like an LC, can be treated as a suppliers'

credit. The underlying commercial contract between the exporter and theIndian importer should provide for drawing of usance drafts with an

upper cap of 180 days on the usance period. When documents under

such usance LCs are discounted by our foreign offices and other banks, it

is not based on any mandate/letter of comfort/guarantee given by the LC

opening bank in India either on their own behalf or at the instance of the

importer, i.e. the buyer of goods. Indian importers are free to enjoy a

credit period of 180 days on their imports from the date of shipment

provided interest for the period does not exceed the prime rate for the

currency in which the goods are invoiced. Prior approval of RBI/GOI was

required for exceeding this time limit, till September 2002. With a view

to simplifying the procedure for imports into India, RBI, in September

2002, decided that the Authorized dealers may approve proposals

received in form ECB for short term credit for financing, by way of

Suppliers' Credit, of import of goods into India, provided. The credit is

being extended for a period of less than 3 years. The amount of credit

does not exceed USD 20 million (approx. Rs. 94 crores now) per import

transaction.

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B. CORRESPONDENT BANKING

The Correspondent Banking Division develops and maintains relationship

with Banks and Financial Institutions across the Globe. This network

Correspondent Banks forms the foundation for all international

operations of SBI. SBI has correspondent banking relations with around

522 leading banks worldwide. The Rupee Vostro accounts of

International Banks and Institutions are maintained and serviced at SBI’s

International Services branch (ISBM) at Mumbai and at Overseas

Branches at Kolkata (Calcutta), Chennai, Cochin, Bangalore and New

Delhi. ACU accounts are also serviced at the overseas branches.

C. MERCHANT BANKING

SBI’s Merchant Banking Group is strongly positioned to offer perfect

financial solutions to the respective business. It provides the resources,

convenience and services to meet the needs of the customer by arrangingForeign Currency credits through:

• Commercial loans

• Syndicated loans

• Lines of Credit from Foreign Banks and Financial Institutions

• FCNR loans

• Financing of Imports.

Products and services include:-

1) Arranging External Commercial Borrowings (ECB)

2) Arranging and participating in international loan syndication

3) Loans backed by Export Credit Agencies

74




D. PROJECT EXPORT FINANCE

State Bank of India is an active participant in the area of finance of Project export activities. These activities will mainly involve financing

the fund based and non fund based requirements of the project exporters.

Project export contracts are generally of high value and exporters

undertaking them are required to offer competitive terms to be able to

secure orders from foreign buyers in the face of stiff international

competition. SBI’s vast network of branches spread all over the countrywhich are authorized to handle trade related transactions, substantial

presence overseas with branches/offices in all major commercial centers

of the world covering all time zones and strong network of correspondent

relationship with top ranking banks in several countries adds to the

competitive strengths to facilitate and meet various requirements of

project exporters. Credit facilities offered:- Various types of credit

facilities, both non fund and fund based that project exporters may need

at the time of bidding and / or for execution of the project is extended by

the Bank.

Non Fund Based Facilities

Letter of Credit facility on behalf of our customer enabling him to import

raw material required for manufacturing goods for project export is

provided by the Bank and also all other following types of guarantees

required for project export contract are issued by SBI:-

Bid Bond Guarantee

Advance Payment Guarantee

Retention Money Guarantee

75




Maintenance Guarantee

Fund based facilities include:-

I. Pre-shipment credit both in Indian rupees and in foreign currency

to extend financial assistance for procuring/ manufacturing/ processing/

packing/ shipping goods meant for export.

II. Rupee/ Foreign currency supplier's credit: - When a project export

is on deferred credit terms, we meet the financial requirement of our

exporter in Indian rupees or foreign currency.

IV. Buyer’s credit: Bank also participates in grant of credit to foreign

buyers under the Buyer’s Credit Scheme’ of Exim Bank.

E. EXPORTER GOLD CARD

State Bank of India has launched "SBI EXPORTERS GOLD CARD

SCHEME" to meet the working capital needs of exporters with goodtrack record and credit worthiness, subject to their fulfilling the specified

eligibility norms. The salient features of the scheme are as under:

Assessment norms have been simplified and for units with export

turnover up to Rs. 100 crore. Standby limit of 20% will be sanctioned to

all the SBI Exporters Gold Card holders over and above the sanctioned

limit to meet credit demands arising out of receipt of sudden orders.

Limits sanctioned will be valid for a period of three years.

Interest will be charged at concessional rate from the Gold Card holders.

The present rate for Packing Credit up to 180 days and Post-shipment

credit up to 365 days would be 3.75% below the Bank's benchmark Prime

Lending Rate. Also, SBI Gold Card holders will be given preference for

grant of packing credit in foreign currency.

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F. OBU (OFFSHORE BANKING UNIT)

State Bank of India has opened the first Offshore Banking Unit (OBU) in

India at the Special Economic Zone, New Bank Building, Andheri (East)

Mumbai 400,096 on 17th July 2003 - another landmark in the history of

India's Financial Sector.

G. USA PATRIOT ACT CERTIFICATION

Following the USA PATRIOT Act and the final rules issued by the U.S.

Department of Treasury, Banks ("Foreign banks") are required to issue

Certification to U.S. banks or broker-dealers in securities ("Covered

Financial Institutions") with which they maintain Correspondent

accounts. For this purpose and as permitted by the final rules, State bank

of India has prepared a Certification for use by any financial institution

that needs a USA PATRIOT Act Certification from State Bank of India

or one of its branches. UCO Bank all set to slug it out news Venkatachari

Jagannathan 18 June 2002

MERCHANT RATES AND FEES WITH REGARDS TO

INTERNATIONAL BANKING:-

A Merchant Account has a variety of fees, some periodic, others charged

on a per-item or percentage basis. Some fees are set by the merchant

account provider, but the majority of the per-item and percentage fees are passed through the merchant account provider to the credit card issuing

bank according to a schedule of rates called interchange fees, which are

set by Visa and MasterCard. Interchange fees vary depending on card

type and the circumstances of the transaction. For example, if a

transaction is made by swiping a card through a credit card terminal it

will be in a different category than if it were keyed in manually.

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DISCOUNT RATES

The discount rate comprises a number of dues, fees, assessments, network

charges and mark-ups merchants are required to pay for accepting credit

and debit cards, the largest of which by far is the Interchange fee. Each

bank or ISO/MLS has real costs in addition to the wholesale interchange

fees, and creates profit by adding a mark-up to all the fees mentioned

above. There are a number of price models banks and ISOs/MLSs use to

bill merchants for the services rendered. Here are the some price models:

TIER PRICING

The 3-Tier Pricing is the most popular pricing method and the simplest

system for most merchants, although the new 6-Tier Pricing is gaining in

popularity. In 3-Tier Pricing, the merchant account provider groups the

transactions into 3 groups (tiers) and assigns a rate to each tier based on a

criterion established for each tier.

QUALIFIED RATES

A qualified rate is the percentage rate a merchant will be charged

whenever they accept a regular consumer credit card and process it in a

manner defined as "standard" by their merchant account provider using

an approved credit card processing solution. This is usually the lowest

rate a merchant will incur when accepting a credit card. The qualified rate

is also the rate commonly quoted to a merchant when they inquire about

pricing. The qualified rate is created based on the way a merchant will be

accepting a majority of their credit cards. For example, for an internet

merchant, the internet interchange categories will be defined as Qualified,

while for a physical retailer only transactions swiped through or read by

their terminal in an ordinary manner will be defined as Qualified.

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MID- QUALIFIED RATES

Also known as a partially qualified rate, the mid-qualified rate is the

percentage rate a merchant will be charged whenever they accept a credit

card that does not qualify for the lowest rate (the qualified rate). This may

happen for several reasons such as a consumer credit card is keyed into a

credit card terminal instead of being swiped and special kind of credit

card is used like a rewards card or business card

A mid-qualified rate is higher than a qualified rate. Some of the

transactions that are usually grouped into the Mid-Qualified Tier can cost

the provider more in interchange costs, so the merchant account providers

do make a markup on these rates. The use of "rewards cards" can be as

high as 40% of transactions. So it is important that the financial impact of

this fee be understood.

NON- QUALIFIED RATES

The non-qualified rate is usually the highest percentage rate a merchant

will be charged whenever they accept a credit card. In most cases all

transactions that are not qualified or mid-qualified will fall to this rate.

This may happen for several reasons such as:

• A consumer credit card is keyed into a credit card terminal instead

of being swiped and address verification is not performed

• A special kind of credit card is used like a business card and all

required fields are not entered

• A merchant does not settle their daily batch within the allotted time

frame, usually past 48 hours from time of authorization.

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CONCLUSION

Banks have influenced economies and politics for centuries.

Historically, the primary purpose of a bank was to provide loans to

trading companies. Banks provided funds to allow businesses to purchase

inventory, and collected those funds back with interest when the goods

were sold. For centuries, the banking industry only dealt with businesses,

not consumers. Banking services have expanded to include services

directed at individuals, and risk in these much smaller transactions is

pooled.

International banking has become an important aspect of world economy.

It deals with various aspects of financial services. Banks offer many

different channels to access their banking and other services.

Though international banking concept is quite old, it has acquired certain

new characteristics and dimensions. Now international banking has

become a very important for international trading and financial

transaction. Its importance is increasing through the globalization of

world economy and we will see its benefits in the near

future very soon.

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B IBILIOGRAPHY

Reference Books & Journals

• Indian Financial system – Khan M. Y.

•

International Banking & Finance - ICFAI• Financial Institution & Market – L. M. Bhole

• Indian Banking – Mr. Chanda

Websites

• www.banknetindia.com

• www.rbi.org

• www.google.com

• www.sbi.com

News papers & Magazines

• Economic Times

http://www.banknetindia.com/

http://www.sbi.com/

http://www.banknetindia.com/

http://www.sbi.com/

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