APROJECT REPORT

ONBENEFITS OF FOREIGN OPERATIONS OF

INDIAN BANKSSUB TOPIC

STRATEGIES AND METHODOLOGIES FOR LEVERAGING AND EXPANDING FOREIGN EXCHANGE BUSINESS IN

AHMEDABAD

Undertaken at

1

ASHRAM ROAD BRANCHAHMEDABAD

In partial fulfillment of ‘Summer Training’ (1st year MBA)

Submitted to

2

AES PG Institute of Business ManagementGujarat University

Ahmedabad

Submitted by

YASHRAJSINGH CHAUHAN [7]

HETALI RAJKAR [44]PREFACE

In every field of education imparted to the student, working on project plays an

immense role in bringing out and exhibiting the qualities which are helpful in implementing

student’s knowledge in the practical life.

When it comes to the practical knowledge in ‘Financial field’, there are number of

areas to be specialized in. one can go for core finance like working capital management,

Investment decisions, capital structure decisions, credit policies etc, and one can look

forward to equity and forex markets as well. Both are important part of the Finance. But

amongst all these fields’ tremendous opportunities are residing in the Foreign Exchange

field. As in India, the FOREX system is main fundamental thing for any kind of International

business.

3

What is the lure of the foreign exchange market? How did it grow to be the most

powerful and important market in the world? And how can you benefit from it?

The foreign exchange market directly impacts every bond, equity, private property,

manufacturing asset and any investments accessible to foreign investors. Foreign exchange

rates play a major role in financing government deficits, equity ownership in companies and

real-estate holdings. Foreign exchange trading helps determine who hires and fires

employees, and who owns the banks at which you maintain your corporate and personal

accounts. The currency in your pocket is literally stock in your country, and like a share, its

value fluctuates on the international market providing knowledgeable traders with substantial

opportunities for profit or loss.

Getting the deep and practical knowledge of this field can be of great help to the

students who are interested in finance. This kind of training and projects can help the

students to use their theoretical knowledge on the practical aspects of the field.

July 16, 2007

Ahmedabad

ACKNOWLEDGEMENT

Study of management is all about gaining knowledge from the experience one gets

from the corporate world. When students get into the corporate world to gain the knowledge,

they are novice. They need and opportunity and of-course help of their seniors to explore the

aspects of business management.

We were given this opportunity by one of the best bank in the banking industries,

especially in forex business. We are obliged to BANK OF BARODA for providing us an

opportunity to undergo training in their esteemed organization.

We wish to express our heartfelt gratitude to

4

Mr. E. F. TUCKER

AGM

FOREX-BOB

ASHRAM ROAD BRANCH,

Mr. R. M. KUMARAN

CHIEF MANAGER

FOREX-BOB

ASHRAM ROAD BRANCH

And

Mr. R. K. PARIKH

MANAGER

FOREX-BOB

ASHRAM ROAD BRANCH

For their immense help in making our training and project fruitful. We would also like

to thank all the employees of Ashram Road Branch for their needed help.

We also thank Dr. Mayank Joshipura for his kind help in the subject and we are thankful to all

other faculty members at AES PGIBM for their kind support.

Finally, not to miss anyone, we thank all the people who have directly or indirectly

helped us a lot throughout the training period and in completion of our project successfully.

YASHRAJSINGH CHAUHAN

______________________

HETALI RAJKAR

______________________

5

EXECUTIVE SUMMARY

The important aspects of our project were to study various Forex operations of Indian Banks and to suggest various strategies and methodologies for leveraging and expanding forex business in Ahmedabad.

Chapter 1 contains basic history of the Foreign Exchange. I.e. the emergence of foreign

exchange market.

Chapter 2 contains some basic information on the Foreign Exchange. i.e. what exactly Foreign

Exchange and what does it include as well as provide.

6

Chapter 3 gives a broad idea the FOREX Market rates. Initiated with the top 6 most traded

currencies and factors affecting currency trading, and the later part of the chapter contains

various types of exchange rates and factors affecting exchange rates.

Chapter 4 contains the information about foreign exchange market and its size and scope both

from the perspective of the Indian and global economy. It also gives the broad idea about

various instruments of forex.

FOREX market is not a market where anyone who has money can come and participate; it has

its own guidelines. In chapter 5 these guidelines which are necessary for FOREX market and

which has been given by RBI are covered. Also the guidelines given by FEDAI are included.

Chapter 6 defines the role of different players of forex market. The major participants are

corporate customers, central banks, banks, investment firms, brokers etc.

Chapter 7 focuses on banks which was our focus of study continued with brief introduction and

overview of Bank of Baroda.

Chapter 8 gives the idea about various foreign operations of Bank of Baroda, like Export

Finance, Import Finance, LCs, ECBs, RTGS, EEFC accounts, Correspondent banking and the

benefits of these operations to Bank of Baroda.

Chapter 9 highlights the various benefits of foreign operations of Indian Banks particularly of

Bank of Baroda.

After studying the various operations and benefits of these operations

Chapter 10 deals with the strategies and methodologies arising out of our study for Bank of

Baroda in general.

Chapter 11 focuses on strategies and methodologies that is essential for expanding and

leveraging forex business specially in Ahmedabad and whole Gujarat region at some level.

Chapter 12 At the end depicts the action points that we have encountered during our summer

study at BOB, which can be useful for enhancing forex business of the bank.

7

RESEARCH METHODOLOGY

Main objective

To learn the Forex operations of Indian Banks

Sub objectives

Studying different aspects of foreign operations

Studying the benefits of foreign operations of Indian banks

8

Developing various strategies and methodologies for leveraging foreign business

in Ahmedabad

Action points for leveraging business in future for BOB

Scope

The project looks into the actual workings of BANK OF BARODA. In its Forex System

study we tried to cover every objective of the project, mentioned above and various

aspects of the Forex business. Scope of our project study is restricted only to foreign

exchange branch of BANK OF BARODA.

Limitations

Time constraints

Lack of proper guidance

Resource constraints

Confidentiality of business operations

TABLE OF CONTENTS1. HISTORY 10

1.1 BASIC HISTORY OF FOREX 11

2. FOREIGN EXCHANGE 13

2.1 WHAT IS FOREIGN EXCHANGE 142.2 WHAT DOES FOREX INVOLVE 152.3 WHAT DOES FOREX PROVIDE 15

3. CURRENCY AND EXCHANGE RATE ARITHMATIC 16

3.1 TOP 6 MOST TRADED CURRENCIES 17

9

3.2 FACTORS AFFECTING CURRENCY TRADING 18

3.2.1 ECONOMIC FACTORS 183.2.2 POLITICAL CONDITIONS 193.2.3 MARKET PSYCHOLOGY 19

3.3 EXCHANGE RATES 21

3.3.1 DEFINITION 213.3.2 DIRECT QUOTE 213.3.3. INDIRECT QUOTE 21

3.4 FACTORS AFFECTING EXCHANGE RATES 23

4. FOREIGN EXCHANGE MARKET 28

4.1 FOREX-SIZE AND SCOPE 304.2 ROLE OF FOREX IN GLOBAL ECONOMY 314.3 INSTUMENTS 32

4.3.1 SPOTS 324.3.2. FORWARDS 324.3.3 FUTURES 324.3.4 OPTIONS 324.3.5 SWAPS 33

4.4 INDIAN FOREX MARKET 36

5. GUIDELINES 37

5.1 RBI 385.2 FEDAI 40

6. MARKET PARTICIPANTS 41

6.1 CORPORATE CUSTOMERS 436.2 CENTRAL BANKS 436.3 INVESTMENT MANAGEMENT FIRMS 446.4 RETAIL EXCHANGE BROKERS 446.5 OVERSEAS FOREX MARKETS 446.6 SPACULATORS 456.7 BANKS 45

7. BANKS 46

7.1 ROLE OF BANKING INDUSTRIES 477.2 INTRODUCTION TO BANK OF BARODA 487.3 GLOBAL PRESENCE OF BANK OF BARODA 51

10

7.3.1 WIDE GLOBAL NETWORK 527.3.2 INDIAN NETWORK 53

7.4 PRODUCTS AND SERVICES 53

8. FOREX OPERATIONS 55

8.1 FCNR 578.2 EXPORT FINANCE 588.3 IMPORT FINANCE 628.4 LCs 648.5 ECBs 708.6 EEFC 758.7 RTGS 778.8 CORRESPONDENT BANKING 798.9 INTERNATIONAL TREASURY 80

9. BENEFITS OF FOREIGN OPERATIONS 81

10. STRATEGIES FOR BANK IN GENERAL 84

11. STRATEGIES AND METHODOLOGIES FOR DEVELOPINGAND LEVERAGING FOREX BUSINESS IN AHMEDABAD 89

12. ACTION POINTS 93

BIBLIOGRAPHY 96

11

BASIC HISTORY OF FOREX

Initially, the value of goods was expressed in terms of other goods, i.e. an economy

based on barter between individual market participants. The obvious limitations of such a

system encouraged establishing more generally accepted means of exchange at a fairly

early stage in history, to set a common benchmark of value. In different economies,

everything from teeth to feathers to pretty stones has served this purpose, but soon metals,

in particular gold and silver, established themselves as an accepted means of payment as

well as a reliable storage of value.

12

Originally, coins were simply minted from the preferred metal, but in stable political

regimes the introduction of a paper form of governmental IOUs (I owe you) gained

acceptance during the middle Ages. Such IOUs, often introduced more successfully through

force than persuasion were the basis of modern currencies.

Before the First World War, most central banks supported their currencies with

convertibility to gold. Although paper money could always be exchanged for gold, in reality

this did not occur often, fostering the sometimes disastrous notion that there was not

necessarily a need for full cover in the central reserves of the government.

At times, the ballooning supply of paper money without gold cover led to devastating

inflation and resulting political instability. To protect local national interests, foreign exchange

controls were increasingly introduced to prevent market forces from punishing monetary

irresponsibility.

In the latter stages of the Second World War, the Bretton Woods agreement was

reached on the initiative of the USA in July 1944. The Bretton Woods Conference rejected

John Maynard Keynes suggestion for a new world reserve currency in favor of a system built

on the US dollar. Other international institutions such as the IMF, the World Bank and GATT

(General Agreement on Tariffs and Trade) were created in the same period as the emerging

victors of WW2 searched for a way to avoid the destabilizing monetary crises which led to

the war. The Bretton Woods agreement resulted in a system of fixed exchange rates that

partly reinstated the gold standard, fixing the US dollar at USD35/oz and fixing the other

main currencies to the dollar - and was intended to be permanent.

The Bretton Woods system came under increasing pressure as national economies

moved in different directions during the sixties. A number of realignments kept the system

alive for a long time, but eventually Bretton Woods collapsed in the early seventies following

president Nixon's suspension of the gold convertibility in August 1971. The dollar was no

longer suitable as the sole international currency at a time when it was under severe

pressure from increasing US budget and trade deficits.

The following decades have seen foreign exchange trading develop into the largest

global market by far. Restrictions on capital flows have been removed in most countries,

13

leaving the market forces free to adjust foreign exchange rates according to their perceived

values.

But the idea of fixed exchange rates has by no means died. The EEC (European

Economic Community) introduced a new system of fixed exchange rates in 1979, the

European Monetary System. This attempt to fix exchange rates met with near extinction in

1992-93, when pent-up economic pressures forced devaluations of a number of weak

European currencies. Nevertheless, the quest for currency stability has continued in Europe

with the renewed attempt to not only fix currencies but actually replace many of them with the

Euro in 2001.

The lack of sustainability in fixed foreign exchange rates gained new relevance with

the events in South East Asia in the latter part of 1997, where currency after currency was

devalued against the US dollar, leaving other fixed exchange rates, in particular in South

America, looking very vulnerable.

But while commercial companies have had to face a much more volatile currency

environment in recent years, investors and financial institutions have found a new

playground. The size of foreign exchange markets now dwarfs any other investment market

by a large factor. It is estimated that more than USD1,200 billion is traded every day, far

more than the world's stock and bond markets combined

Today, the values of the major world currencies are independent of each other, with

intervention available to the states only through the central banking system.

14

What is Foreign Exchange?

Countries of the world have been exchanging goods & services amongst themselves

from time immemorial. The world has come a long way from the days of barter trade. With

the inventions of money, the rigors & problems of barter trade have disappeared. Barter

trade has made way to exchange of goods & services for money instead of exchange for

other goods & services.

15

As every sovereign nation has a distinct national currency, international trade has

involved exchange of currencies. It is said that although the business of changing money is

as old as money itself, the foreign exchange markets where currencies of different countries

are exchanged, started taking shape only in late nineteenth century. The exchange of

currencies has brought about the concept of exchange rates.

Like any other commodity, the price of one unit of foreign currency can be stated in

terms of domestic currency; in fact a unit of one currency can be stated in terms of any other

currency. Rate of exchange means the price of one currency in terms of other currency. To

state differently, the exchange rate is said to be the rate at which a number of units of one

currency can be exchanged for a number of units of another currency. Simply defined,

exchange rate is nothing but value of one currency expressed in terms of another currency.

For example, the price of US Dollar (USD) of Japanese Yen (JPY) or Pound Sterling (GBP)

can be expressed in terms of Indian Rupees (INR). Thus, if we say USD 1 = INR 47.00. It

means the exchange of US Dollar & Indian Rupees is 1:47.00. Similarly, GBP 1= INR 77

meaning that the exchange rate of Sterling Pounds & Indian Rupee is 1:77.

Different countries have adopted different exchange rate system at different times.

What Does FX Involve?

A foreign exchange deal involves:

Exchange of two currencies

As an agreed exchange rate

For a specified settlement date

Settlement instructions for receipt and payment, and

Confidence that the terms of the trade will be adhered to i.e. limits

16

What Does FX provide?

Foreign exchange provides us:

The method or mechanism to conduct and settle the proceeds of international

trade

The means to obtain / provide technology, expertise and the sharing of information

The means to minimize the risks of currency fluctuations – primarily through the

use of various tools and financial instruments, and

Trading opportunities to generate incremental income.

17

Top 6 Most Traded Currencies

Rank CurrencyISO 4217

CodeSymbol

1 United States dollar USD $

2 Eurozone euro EUR €

3 Japanese yen JPY ¥

4 British pound sterling GBP £

5-6 Swiss franc CHF -

5-6 Australian dollar AUD $18

Factors affecting currency trading

Supply and demand for any given currency, and thus its value, are not influenced by

any single element, but rather by several. These elements generally fall into three categories:

economic factors, political conditions and market psychology.

Economic factors

19

These include economic policy, disseminated by government agencies and central

banks, economic conditions, generally revealed through economic reports, and other

economic indicators.

Economic policy comprises government fiscal policy (budget/spending practices) and

monetary policy (the means by which a government's central bank influences the supply and

"cost" of money, which is reflected by the level of interest rates).

Economic Factors include

Government budget deficits or surpluses

The market usually reacts negatively to widening government budget deficits, and

positively to narrowing budget deficits. The impact is reflected in the value of a country's

currency.

Balance of trade levels and trends:

The trade flow between countries illustrates the demand for goods and services,

which in turn indicates demand for a country's currency to conduct trade. Surpluses and

deficits in trade of goods and services reflect the competitiveness of a nation's economy. For

example, trade deficits may have a negative impact on a nation's currency.

Inflation levels and trends: Typically, a currency will lose value if there is a high level of

inflation in the country or if inflation levels are perceived to be rising. This is because inflation

erodes purchasing power, thus demand, for that particular currency.

Economic growth and health: Reports such as gross domestic product (GDP), employment

levels, retail sales, capacity utilization and others, detail the levels of a country's economic

growth and health. Generally, the more healthy and robust a country's economy, the better

its currency will perform, and the more demand for it there will be.

Political conditions

20

Internal, regional, and international political conditions and events can have a

profound effect on currency markets.

For instance, political upheaval and instability can have a negative impact on a

nation's economy. The rise of a political faction that is perceived to be fiscally responsible

can have the opposite effect. Also, events in one country in a region may spur positive or

negative interest in a neighboring country and, in the process, affect its currency.

Market psychology

Market psychology and trader perceptions influence the foreign exchange market in a

variety of ways:

Flights to quality:

Unsettling international events can lead to a "flight to quality" -with investors seeking a

"safe haven". There will be a greater demand, thus a higher price, for currencies perceived

as stronger over their relatively weaker counterparts.

Long-term trends:

Very often, currency markets move in long, pronounced trends. Although currencies

do not have an annual growing season like physical commodities, business cycles do make

themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic

or political trends.

"Buy the rumor, sell the fact:" This market truism can apply to many currency

situations. It is the tendency for the price of a currency to reflect the impact of a particular

action before it occurs and, when the anticipated event comes to pass, react in exactly the

opposite direction. This may also be referred to as a market being "oversold" or

"overbought".[5] To buy the rumor or sell the fact can also be an example of the cognitive bias

21

known as anchoring, when investors focus too much on the relevance of outside events to

currency prices.

Economic numbers:

While economic numbers can certainly reflect economic policy, some reports and

numbers take on a talisman-like effect - the number itself becomes important to market

psychology and may have an immediate impact on short-term market moves. "What to

watch" can change over time. In recent years, for example, money supply, employment,

trade balance figures and inflation numbers have all taken turns in the spotlight.

Technical trading considerations:

As in other markets, the accumulated price movements in a currency pair such as

EUR/USD can form patterns that may be recognized and utilized by traders for the purpose

of entering and exiting the market, leading to short-term fluctuations in price. Many traders

study price charts in order to identify such patterns. [6]

Exchange rates

Although exchange rates are affected by many factors, in the end, currency prices are a

result of supply and demand forces. The world's currency markets can be viewed as a huge

melting pot: in a large and ever-changing mix of current events, supply and demand factors

are constantly shifting, and the price of one currency in relation to another shifts accordingly.

No other market encompasses (and distills) as much of what is going on in the world at any

given time as foreign exchange.

Definition

22

Rate of Exchange

A rate of exchange is the price of a unit of one Currency expressed in terms of another

currency. Such rates may be quoted as Direct rates or as Indirect rates. Reserve Bank of

India does not deal directly with the customers i.e. importers, exporters, remitters,

beneficiaries of remittances etc. Popularly called "Merchants" and therefore, has authorised

some of the banks for this purpose. Reserve Bank of India, under Foreign Exchange

Management Act, 1999, Section 10) has granted Authorised Dealer's licence to various

banks to deal in Foreign Exchange. FEDAI frames rules for the same. The exchange rates

quoted to these "Merchants" are known as "Merchant Rates".

Direct quotations

Under a system of Direct Quotations, the exchange rates are quoted where the unit(s) of

foreign currency remains constant, whereas the home currency units fluctuate:

I.e.

US $ 1 = Rs. 44.60

US $ 1 = Rs. 44.80 etc.

Indirect Quotations

Under a system of Indirect Quotations, the exchange rates are quoted where the unit(s) of

home currency remains constant against variable units of foreign currency.

I.e. Rs. 100/- = US $ 2.2421

Rs. 100/ = US $ 2. 2415

In India we follow the direct method of quoting exchange rates. In this system of rate

quotation, the principle applied is "Buy Low, Sell High". We quote so many Rupees and

Paise for 1 unit of foreign currency or 100 units of foreign currency. All exchange rates in

Indian Rupees are quoted for 1 unit of foreign currency, except the following currencies for

which the exchange rates are quoted against 100 units of foreign currencies:

Indonesian Rupiah

Japanese Yen

Kenyan Shillings

Bangladesh Taka

Myanmar Kyat

23

Iranian Rial

Pakistani Rupees

Sri Lankan Rupees

FACTORS AFFECTING EXCHANGE RATES

The Bretton Woods conference in July 1944 resulted into a new monetary order. The

main objectives of this were to establish an international monetary system with stable

exchange rates, to eliminate exchange controls, and to bring about convertibility of all

currencies. This required the central banks of various countries to declare their parity to gold

or to the US Dollar. In turn, USA agreed to exchange US Dollar for gold at 35 dollars per

ounce. The Central banks were expected to keep the rate fluctuations within ±1%. However,

due to chronic US balance of payments deficits there was a general loss of confidence in the

US Dollar. This culminated in the demise of the Bretton Woods System in 1971. At the

monetary conference held on December 17 and 18, 1971, a new arrangement, popularly

24

known as Smithsonian Agreement was at. Under the system intervention points range was

widened to ± 2.25%.

However, as the USA had done away with the convertibility of Dollars into Gold, the

arrangement under Smithsonian Agreement could not continue for long and ultimately in

1973 many countries started floating their currencies. This development gave rise to

fluctuating exchange rates. Although in a free market it is the demand and supply of the

currency which should determine the exchange rates there are many more factors

responsible for these fluctuations. The volatility of exchange rates cannot be traced to a

single reason and consequently it becomes difficult to precisely define the factors that affect

the exchange rates. However, the important among them are:

(I) Balance of payments

Balance of payments position of a country is a definite indicator of the demand and

supply of foreign exchange. If a country has a favorable balance of payments position it

implies that there is more supply of foreign exchange and therefore foreign currencies will

tend to be cheaper vis-à-vis domestic currency. However, if balance of payments position is

unfavorable, it indicates that there is more demand for foreign exchange and this will result in

the price of foreign exchange vis-à-vis domestic currency firming up.

(II) Strength of the economy

The relative strength of the economy also has an effect on the demand and supply of

foreign currencies. If an economy is growing at a faster rate it is generally, in the long-run,

expected to have a better performance on balance of trade. However, in the short run

increasing economic activity in the country may necessitate higher imports and exports may

take sometime to increase. The economic growth is indicated by various parameters like

relative rate of growth in industrial production and capacity utilization, rate of increase in

Gross National Product and fall in employment rate, etc.

25

(III) Fiscal policy

The fiscal policy followed by government has an impact on the economy of the country

which in turn affects the exchange rates. If the government follows an expansionary policy by

having low interest rates, it will fuel the engine of economic growth and will lead to better

trade performance. However, a word of caution is necessary here. If the government is

following an expansionary policy by resorting to high budget deficit and monetizing the

deficit, this will lead to high inflation in the economy. This will prove to be counter productive

as far as growth in exports is concerned.

(IV) Interest rate

High interest rates make the speculative capital move between countries and this

affects the exchange rates. The capital is attracted, provided there are no controls towards

currencies yielding high interest rates. If interest rates of domestic currency are raised this

will result in more demand for domestic currency and more supply of the foreign currency,

thus making the latter cheaper vis-à-vis the former.

(V) Monetary policy

The central banks of various countries have a control on the monetary policy to be

pursued although it is generally in consonance with the fiscal policies of the government.

Monetary policy is a very effective tool for controlling money supply, and is used particularly

for keeping a tab on the inflationary pressures in the economy. The main objective of the

monetary policy of any economy is to maintain the money supply in the economy at a level

which will ensure price stability, full employment and growth in the economy. Pursued by the

central bank, it also gives a hint about the future interest rates. If the money supply in an

economy is more it will lead to inflation and the central bank will raise interest rates, sell

government securities through open market operations, raise cash reserve requirement thus

26

giving a signal for tight money supply policy. On the other hand, to spur the growth in the

economy the central bank may lower interest rates, buy government securities in the market,

and lower the cash reserve requirements thus heralding an era of easy monetary policy. This

will be a sign for low interest rates in future. It will be clear from the above that monetary

policy influences interest rates, inflation, employment, etc. and consequently, affects the

exchange rates.

(VI) Political factors

If a change is expected in the government on account of elections or if there is change

in the incumbency in the government, the exchange rates may be affected. Market thrives on

stability and any perception of political instability is sufficient to move exchange rates

significantly. However, whether the currency of the country concerned will become stronger

or weaker will depend upon expected policies to be pursued by the new government which is

likely to take over. But there are some currencies, like the US Dollar, Swiss Franc etc. in

which people have confidence and at times of any international crisis foreign funds move into

these currencies. These are known as ‘safe haven‘currencies. War also affects the exchange

rates of the currencies of the country involved. Sometimes it affects the currencies of other

countries too.

(VII) Exchange control

Exchange control is generally aimed at disallowing free movement of capital flows and

it therefore affects exchange rates. Sometimes countries exercise control through exchange

rate mechanism by keeping the price of their currency at an artificial level. If a country wants

to give a boost to exports, it will keep the value of its currency low vis-à-vis the foreign

currency. This will help exporters in realizing more units of the local currency for the same

units of foreign currency received by them as export earnings. However, reverse would be

the case if the government decides to follow a liberal import policy.

27

(VIII) Central Bank intervention

Buying or selling of foreign exchange in the market by the central bank with a view to

increase the supply or demand, thereby affecting the exchange rates is known as

‘intervention‘. If a central bank is of the opinion that local currency is becoming stronger

thereby affecting the exports, it will buy foreign currency and sell local currency. It will

increase the demand for foreign currency and the rates of foreign currency vis-à-vis local

currency will go up. However, if the rate of exchange is kept artificially at low levels, it tends

to accelerate inflation. Therefore, the central bank has to take into consideration many

factors before intervening in the market.

(IX) Speculation

In FOREX markets, a dealer taking speculative positions is common. If a few big

speculative operators are buying/selling a particular currency in a big way, others may follow

suit and that currency may strengthen/weaken in the short run. This is popularly known as

the ‘bandwagon effect’ and this can affect exchange rates significantly, particularly in the

near term.

(X) Technical factors

Technical factors particularly in the short run can influence exchange rates. If, for

example, regulations by the central bank make it necessary to limit the size of open position

and if banks have a ‘big short‘ position, they may, in order to cover such a position, buy

foreign exchange. This will result in higher short-term demand which is not genuine.

Similarly, reserve requirement of the central bank may also create a technical position thus

influencing the exchange rates.

28

29

For any currency the main foreign exchange market is the country's financial centre -

viz. for genuine, trade related corporate business. This is the centre where the country's

central bankers and monetary authorities determine and implement their monetary policies,

its investment strategies and above all its intervention polices to ensure stability in its

currency markets. This is the centre where the country's business leaders transact their trade

related financial deals and where the rest of the world comes to as a last resort to cover its

requirements.

30

However, for major world currencies, the world is a 24 hour market that stretches from

Wellington to Los Angeles. In this global marketplace there are certain major trading centers

called "money centers" and these are Tokyo, Hong Kong, Singapore, Bahrain, London,

Frankfurt, Zurich, New York and Los Angeles.

The FX Market is a facilitating mechanism through which currencies are exchanged. It

comprises FX traders connected across the world through an advanced telecommunication

network

Foreign Exchange Markets – size and scope

The foreign exchange market dwarfs the combined operations of the New York,

London, and Tokyo futures and stock exchanges. Daily turnover on the spot market is

approximately US$1.5 trillion per day.

31

Spot transactions and forward outright FX trading takes place in the inter-bank market.

51% of the market is in spot FX transactions, followed by 32% in currency swap transactions.

Forward outright FX transactions represent another 5% of this daily turnover. Options on

inter-bank FX transactions making up another 8%. Therefore the inter-bank market accounts

for 96% of the global foreign exchange market, with the remaining 4% being divided among

all the global futures exchanges.

The foreign exchange (currency or forex or FX) market exists wherever one

currency is traded for another. It is by far the largest financial market in the world, and

includes trading between large banks, central banks, currency speculators, multinational

corporations, governments, and other financial markets and institutions. The average daily

trade in the global forex markets currently exceeds US$1.9 trillion. Retail traders (individuals)

are a small fraction of this market and may only participate indirectly through brokers or

banks.

Market size and liquidity

The foreign exchange market is unique because of:

its trading volume,

the extreme liquidity of the market,

the large number of, and variety of, traders in the market,

its geographical dispersion,

its long trading hours - 24 hours a day (except on weekends).

the variety of factors that affect exchange rates,

The role of Forex in the Global Economy

Over time, the foreign exchange market has been an invisible hand that guides the

sale of goods, services and raw materials on every corner of the globe. The forex market

was created by necessity. Traders, bankers, investors, importers and exporters recognized

32

the benefits of hedging risk, or speculating for profit. The fascination with this market comes

from its sheer size, complexity and almost limitless reach of influence.

The market has its own momentum, follows its own imperatives, and arrives at its own

conclusions. These conclusions impact the value of all assets -it is crucial for every individual

or institutional investor to have an understanding of the foreign exchange markets and the

forces behind this ultimate free-market system.

Inter-bank currency contracts and options, unlike futures contracts, are not traded on

exchanges and are not standardized. Banks and dealers act as principles in these markets,

negotiating each transaction on an individual basis. Forward "cash" or "spot" trading in

currencies is substantially unregulated - there are no limitations on daily price movements or

speculative positions

Instruments of foreign exchange market

There are several types of financial instruments commonly used.

Spots

33

A spot transaction is a two-day delivery transaction, as opposed to the futures

contracts, which are usually three months. This trade represents a “direct exchange”

between two currencies, has the shortest time frame, involves cash rather than a contract;

and interest is not included in the agreed-upon transaction. The data for this study come from

the spot market. Spot has the largest share by volume in FX transactions among all

instruments.

Forwards

One way to deal with the Forex risk is to engage in a forward transaction. In this

transaction, money does not actually change hands until some agreed upon future date. A

buyer and seller agree on an exchange rate for any date in the future, and the transaction

occurs on that date, regardless of what the market rates are then. The duration of the trade

can be a few days, months or years.

Futures

Foreign currency futures are forward transactions with standard contract sizes and

maturity dates — for example, 500,000 British pounds for next November at an agreed rate.

Futures are standardized and are usually traded on an exchange created for this purpose.

The average contract length is roughly 3 months. Futures contracts are usually inclusive of

any interest amounts.

Options

A foreign exchange option (commonly shortened to just FX option) is a derivative

where the owner has the right but not the obligation to exchange money denominated in one

currency into another currency at a pre-agreed exchange rate on a specified date. The FX

options market is the deepest, largest and most liquid market for options of any kind in the

world.

Swap

The most common type of forward transaction is the currency swap. In a swap, two

parties exchange currencies for a certain length of time and agree to reverse the transaction

at a later date. These are not contracts and are not traded through an exchange.

34

Forex swap

Forex swap is an over the counter short term interest rate derivative instrument. A

Forex swap consists of a spot foreign exchange transaction entered into at exactly the same

time and for the same quantity as a forward foreign exchange transaction. The forward

portion is the reverse of the spot transaction, where the spot purchase is offset by a forward

selling. In this reason, surplus funds in one currency are for a while swapped into another

currency for better use of liquidity. Protects against adverse movements in the forex rate, but

favourable moves are renounced.

The fixed rate in this transaction is the forward rate that is locked in by the forward

contract. The floating rate will be the overnight rate that is realized on a daily basis by the

spot transaction. Typically, the floating side of these trades are indexed to the Overnight

Index Swap (OIS) rate. This rate is an average of the rates that are paid based on a survey.

It should not be confused with a currency swap, which is a much rarer, long term

transaction, governed by a slightly different set of rules.

In emerging money markets, Forex swaps are usually the first derivative instrument to be

traded, ahead of Forward rate agreements.

Currency swap

A currency swap is a foreign exchange agreement between two parties to exchange a

given amount of one currency for another and, after a specified period of time, to give back

the original amounts swapped.

35

Currency swaps can be negotiated for a variety of maturities up to at least 10 years. Unlike a

back-to-back loan, a currency swap is not considered to be a loan by United States

accounting laws and thus it is not reflected on a company's balance sheet. A swap is

considered to be a foreign exchange transaction (short leg) plus an obligation to close the

swap (far leg) being a forward contract.

Currency swaps are often combined with interest rate swaps. For example, one company

would seek to swap a cash flow for their fixed rate debt denominated in US dollars for a

floating-rate debt denominated in Euro. This is especially common in Europe where

companies "shop" for the cheapest debt regardless of its denomination and then seek to

exchange it for the debt in desired currency.

Interest rate swap

In the field of derivatives, a popular form of swap is the interest rate swap, in which

one party exchanges a stream of interest for another party's stream. These were originally

created to allow multi-national companies to evade exchange controls. Interest rate swaps

are normally 'fixed against floating', but can also be 'floating against floating' rate. A single-

currency 'fixed against fixed' rate swap would be theoretically possible, but since the entire

cash-flow stream can be predicted at the outset there would be no reason to maintain a swap

contract as the two parties could just settle for the difference between the present values of

the two fixed streams. Because one party would be definitely at a disadvantage in such an

exchange, that party would decide not to enter into the deal. Hence, there are no single-

currency 'fixed versus fixed' swaps in existence. If there is an exchange of interest rate

obligation, then it is termed a liability swap. If there is an exchange of interest income, then it

is an asset swap.

Interest rate swaps are often used by companies to alter their exposure to interest-

rate fluctuations, by swapping fixed-rate obligations for floating rate obligations, or vice versa.

By swapping interest rates, a company is able to alter their interest rate exposures and bring

them in line with management's appetite for interest rate risk.

Example

36

Consider the following illustration in which Party A agrees to pay Party B periodic

interest rate payments of LIBOR + 50 bps (0.50 %) in exchange for periodic interest rate

payments of 3.00 %. Note that there is no exchange of the principal amounts and that the

interest rates are on a "notional" (i.e. imaginary) principal amount. Also note that the interest

payments are settled in net (e.g. if LIBOR + 50 bps is 1.20 % then Party A receives 1.80 %

and Party B pays 1.80 %). The fixed rate (3.00 % in this example) is referred to as the swap

rate.

Trading An interest-rate swap is one of the more common forms of over-the-counter

derivatives. It is the most widely used derivative in terms of its outstanding notional amount,

but it's not standardized enough and doesn't have the properties to easily change hands in a

way that will let it be traded through a futures exchange like an option or a futures contract.

INDIAN FOREX MARKETS

37

Foreign Exchange business in India is regulated closely by the RBI. With Exchange

Control Regulations, the RBI ensures that involvement in the Foreign Exchange business is

restricted to certain sections of the business community only.

The main market participants here are:

Corporate: Importers, Exporters and Customers for genuine trades or merchant

transactions.

Banks: One authorized dealer dealing with another to generate profit or cover its

open exposure.

Overseas Traders: Banks in India are permitted to buy and sell currencies abroad

in cover of customer requirements. They have very recently been permitted to

initiate positions abroad too. Overseas banks call banks in India to cover their

Indian Rupee requirements.

Authorized Dealers v/s RBI: This occurs only when the RBI intervenes in the

market and not in the normal course.

The Indian FX Market has seen a remarkable growth in the last few years. The reasons for

are:

Relaxation of controls by RBI and permitting banks to deal freely in the Inter-bank

market - this essentially is the process of economic reforms.

Better communication and availability of information - Reuters, Telerate, Knight

Ridder, RTA, Dealing System, Swift etc.

A virtual explosion in volumes in global FX market and Indian markets follows suit.

General improvement in competence, freehand to trade and generate incremental

income and

The likelihood of full convertibility of rupee in the near future.

38

39

RBI (RESERVE BANK of INDIA)

Guidelines

1. Category

Exporter

Importer

Foreign Currency Borrower

2. Currency – Blanket Permission. The currency which has no blanket permission has to

go through RBI reference or say RBI reference is necessary for those currencies for

doing any kind of trading. The currencies with blanket permission are USD, EUR,

GBP, CHF, JPY, AUD and CAD. These currencies are used for payment of Imports;

accept of Exports and for borrowing.

3. Trade Amount (expect for borrower)

4. Duration

On the date or above the starting period and before the end date.

5. Speculation

No speculation is allowed as per RBI

6. Trading

Exporter – he has receivables so if foreign currency goes up he has profit

and if FC goes down than it is risk for him. An exporter’s risk starts on

receipt of an export order or an Export L/C. Risk ends when payment is due;

On shipment (DP Basis) or end of credit period (DA Basis)

40

Importer – he has payment to make so if foreign currency goes down he

has profit and if FC goes up than it is risk for him. An importer’s risk starts

on placing an import order or opening of Import L/C and it ends when

payment is due, either on receipt of documents (DP Basis) or end of credit

period (DA Basis)

RBI permits importers and exporters to hedge their exposures (partial or

full) at any time from the commencement to the termination of the FX risk

Banks are authorized to provide cover against confirmed orders or L/C.

They may also quote rates against past performance

RBI also permits exporters/importers to hedge their exposures against cross

currencies. Trading in cross currencies requires a thorough understanding

of currency markets and a pro-active participation in the market

41

F E D A IFOREIGN EXCHANGE DEALERS ASSOCIATION OF INDIA

Foreign Exchange business in India was confined to few foreign banks only till the

period 1959. The said group banks were known as Exchange Banks. They had formed an

Association, which was known as the "Exchange Banks' Association". It was mainly

covering the areas of activities within Bombay (now Mumbai), Calcutta (now Kolkata),

Madras (now Chennai), Delhi and Amristsar. On introduction of the exchange control in

India during 1939, the said Association was functioning within rules framed by RBI. The

rules and regulations - introduced and practiced were also covered by RBI approval. On

account of expansion in the foreign trade, and business, RBI allowed schedule commercial

banks also to undertake foreign exchange transactions. Those banks which were allowed

and permitted by RBI to deal in foreign exchange transactions were known as AD -

Authorized Dealers. The FEDAI - Foreign Exchange Dealers' Association of India was

formed with approval of RBI during August 1958. It was under ECM-RBI directives under

reference ECS/198/86-58-Gen dated 16th August, 1958, authorized the banks to handle

foreign exchange business.

All Public sector banks, foreign banks, private sector and co-operative banks and

certain Financial institutions are the members of FEDAI. FEDAI is a non-profit making

Association and relative expenses are shared by all its member banks. FEDAI acts as a

facilitating body and in consultation with Reserve Bank of India, frames rules / regulations

for AD in India for conduct of the foreign exchange business related transactions.

FEDAI is the Association of the member Banks. Naturally, the guidelines and rules

prepared were of interest of the member Banks. However, on account of liberalization and

reforms introduced during 1991 to boost the foreign trade to and fro India, it becomes

imperative by FEDAI to review Rules and Guidelines. FEDAI has also taken due care of the

interest of both Importers and Exporters while revising rules and guidelines

42

43

Unlike a stock market, where all participants have access to the same prices, the

Forex market is divided into levels of access. At the top is the inter-bank market, which is

made up of the largest investment banking firms. Within the inter-bank market, spreads,

which are the difference between the bid and ask prices, are razor sharp and usually

unavailable, and not known to players outside the inner circle. As you descend the levels of

access, the difference between the bid and ask prices widens. This is due to volume. If a

trader can guarantee large numbers of transactions for large amounts, they can demand a

smaller difference between the bid and ask price, which is referred to as a better spread. The

levels of access that make up the forex market are determined by the size of the “line” (the

amount of money with which they are trading). The top-tier inter-bank market accounts for

53% of all transactions. After that there are usually smaller investment banks, followed by

large multi-national corporations (which need to hedge risk and pay employees in different

countries), large hedge funds, and even some of the retail forex market makers. According to

Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other

institutional investors have played an increasingly important role in financial markets in

general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes,

“Hedge funds have grown markedly over the 2001-2004 period in terms of both number and

overall size” Central banks also participate in the forex market to align currencies to their

economic needs.

44

Corporate Customers

Institutional and Individual Customers, Exporters, Importers, Foreign Currency

Borrowers and Lenders, Investors and Fund Managers all form corporate customers. These

players can be major participants in markets where there are exchange controls and

restricted currency trading. An important part of this market comes from the financial

activities of companies seeking foreign exchange to pay for goods or services. Commercial

companies often trade fairly small amounts compared to those of banks or speculators, and

their trades often have little short term impact on market rates. Nevertheless, trade flows are

an important factor in the long-term direction of a currency's exchange rate. Some

multinational companies can have an unpredictable impact when very large positions are

covered due to exposures that are not widely known by other market participants.

Central Banks

National central banks play an important role in the foreign exchange markets. They

try to control the money supply, inflation, and/or interest rates and often have official or

unofficial target rates for their currencies. They can use their often substantial foreign

exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization

strategy would be for central banks to buy when the exchange rate is too low, and to sell

when the rate is too high — that is, to trade for a profit based on their more precise

information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is

doubtful because central banks do not go bankrupt if they make large losses, like other

traders would, and there is no convincing evidence that they do make a profit trading.

The mere expectation or rumor of central bank intervention might be enough to stabilize a

currency, but aggressive intervention might be used several times each year in countries with

a dirty float currency regime. Central banks do not always achieve their objectives, however.

The combined resources of the market can easily overwhelm any central bank. Several

scenarios of this nature were seen in the 1992-93 ERM collapse, and in more recent times in

Southeast Asia.

45

Investment management firms

Investment management firms (who typically manage large accounts on behalf of

customers such as pension funds and endowments) use the foreign exchange market to

facilitate transactions in foreign securities. For example, an investment manager with an

international equity portfolio will need to buy and sell foreign currencies in the spot market in

order to pay for purchases of foreign equities. Since the forex transactions are secondary to

the actual investment decision, they are not seen as speculative or aimed at profit-

maximization.

Some investment management firms also have more speculative specialist currency

overlay operations, which manage clients' currency exposures with the aim of generating

profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small,

many have a large value of assets under management (AUM), and hence can generate large

trades.

Retail Exchange Brokers

Exchange brokers provide an important service to FX markets all over. They

are instrumental in bringing buyers and sellers together by providing rates, market

information and their network across various centers. Forex brokers generally deal with

banks. In India, they are not allowed to deal on their own account.

Overseas FX Markets

FX markets world-wide have an astronomical turnover which is estimated to run into

hundreds of billions of dollars. Of the total volume of FX trade, genuine corporate demand is

estimated to constitute only around 5% of the total volume. The FX market is largely

supported by a very advanced communication network which not only provides uninterrupted

information on world currencies, economies, politics and the like, it also is characterized by a

very large number of participants. This is what gives the market the depth and the clout it

has. Some of the most popular communication systems available in the market today are

Reuters Information Service, Telerate, Reuters Technical Analysis, Reuters TV, Knight

Ridder, Reuters Dealing System etc.

46

Speculators

Speculators are in the market mainly to generate trading income. The growth in

volumes, better communications, pressures to constantly generate profits and a general

improvement in competence have all contributed to see the emergence of the speculators as

a force to reckon with. Banks and corporate, at different times, can be speculators as well.

Banks

Banks are the most active market participants. They essentially perform the task of

market makers. With their ability to take on foreign exchange positions, they can quote

prices for their own account. They have the communication network, branches, support

from exchange brokers, access to overseas markets and limits with overseas banks which

enable them to be market makers. In India, RBI license to engage in FX transactions is

required and those that are granted this license are called Authorized Dealers. The

authorized dealers collectively constitute the Interbank Foreign Exchange (FOREX) market

in India.

The interbank market caters for both the majority of commercial turnover and large

amounts of speculative trading every day. A large bank may trade billions of dollars daily.

Some of this trading is undertaken on behalf of customers, but much is conducted by

proprietary desks, trading for the bank's own account.

47

48

Role of banking Industry:

For India to become an economic powerhouse, it would not suffice if one sector

alone performs. The engine of growth has to fire on all cylinders to have broad based

shift in income levels. Though the predominance on agriculture has come down, still

it provides the biggest pool of jobs. Manufacturing has its own pride of place though

its share has been taken partly by the service sector’s envious growth levels. Banks

are in a position to contribute for the growth of all the three sectors. This would help

in rising income levels, generate savings, augment capital formation and thus be a

catalyst for all round growth.

49

BANK OF BARODA

BIRTH

Bank of Baroda was founded by Maharaja Sayajirao Gaekwad of Baroda on July 20,

1908 with a paid up capital of Rs 10 lakhs. Since then the bank has traversed an eventful

and successful journey of almost 100 years. Today, Bank of Baroda has a network of 2737

branches including 42 overseas branches spread over 21 countries.

In mid-eighties, the Bank of Baroda diversified into areas of merchant banking,

housing finance, credit cards and mutual funds. In 1995 Bank raised Rs 300 crores through a

Bond issue. In 1996 the Bank tapped the capital market with an IPO of Rs850 crores. Bank

of Baroda took the lead in shifting from manual operating systems to a computerized work

environment. Today, the Bank has 1918 computerized branches, covering 70% of its network

and 91.64% of its business.

Bank of Baroda gives high priority to quality service. In its quest for quality, the Bank

has secured the ISO 9001:2000 certifications for 15 branches.

50

A saga of vision and enterprise

It has been a long and eventful journey of almost a century across 21 countries.

Starting in 1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda

Corporate Centre in Mumbai is a saga of vision, enterprise, financial prudence and

corporate governance.

It is a story scripted in corporate wisdom and social pride. It is a story crafted in

private capital, princely patronage and state ownership. It is a story of ordinary bankers

and their extraordinary contribution in the ascent of Bank of Baroda to the formidable

heights of corporate glory. It is a story that needs to be shared with all those millions of

people - customers, stakeholders, employees & the public at large - who in ample

measure, have contributed to the making of an institution…

51

Mission Statement

To be a top ranking National Bank of International

Standards committed to augmenting stake holders' value

through concern, care and competence.

LOGO

BOB’s new logo is a unique representation of a universal symbol. It comprises dual ‘B’

letterforms that hold the rays of the rising sun. They call this the Baroda Sun.

The sun is an excellent representation of what the bank stands for. It is the single

most powerful source of light and energy – its far reaching rays dispel darkness to illuminate

everything they touch. At Bank of Baroda, they seek to be the source that will help all their

stakeholders realize their goals.

To BOB’s customers, they seek to be a one-stop, reliable partner who will help them

address different financial needs. To their employees, they offer rewarding careers and to

their investors and business partners, maximum return on their investment. The single-

colour, compelling vermillion palette has been carefully chosen, for its distinctiveness as it

stands for hope and energy. They also recognize that their bank is characterized by diversity.

Their network of branches spans geographical and cultural boundaries and rural-urban

divides.

Their customers come from a wide spectrum of industries and backgrounds. The

Baroda Sun is a fitting face for their brand because it is a universal symbol of dynamism and

optimism – it is meaningful for their many audiences and easily decoded by all. Their new

corporate brand identity is much more than a cosmetic change. It is a signal that they

recognize and are prepared for new business paradigms in a globalized world. At the same

time, they will always stay in touch with their heritage and enduring relationships on which

their bank is founded. By adopting a symbol as simple and powerful as the Baroda Sun, they

hope to communicate both.

52

Global presence of BOB

53

Wide global network

Bank of Baroda started its overseas journey by opening its first branch way back in 1953 in Mombassa, Kenya. Since then the Bank has come a long way in expanding its international network to serve NRIs/PIOs and locals. Today it has transformed into India’s International Bank.

It has significant international presence with a network of 61 offices in 21 countries including 42 branches of the Bank, 16 branches of its six Subsidiaries and three Representative Offices in Malaysia, China & Thailand. The Bank also has one Joint Venture in Zambia with 9 branches.

The Bank has presence in world’s major financial centers i.e. New York, London, Dubai, Hong Kong, Brussels and Singapore.

The "round the clock around the globe", Bank of Baroda is further in the process of identifying/opening more overseas centers for increasing its global presence to serve its 29 million global customers in still better way.

The Bank has recently upgraded its operations in Hong Kong on 2nd April 2007 and now offers full banking service through its two branches at Central and Tsim Sha Tsui. It would also be upgrading its operations to full banking service in China and through JV in Malaysia shortly.

The Bank has plans to open new offices in Trinidad & Tobago, Australia and Ghana for which permissions / in principle approvals from host country regulators have been received. It is also in process of establishing offices in Canada, New Zealand, Isle of Man, Sri Lanka, Qatar, Bahrain, Saudi Arabia, Mozambique, Russia etc. Besides this, it has plans to extend its reach in existing countries of operations in UK, UAE, South Africa, Tanzania, and Botswana.

Here’s a brief look at how international banking with Bank of Baroda is both dependable and efficient.

Correspondent Links

BOB’s International Banking network is further augmented by correspondent links with more than 500 leading Banks in every country around the world over.

54

Indian Network

The international network is supported by a large Indian network through International Business Branches, Non Resident Indian Branches, 115 Authorized Forex Branches and more than 2600 other branches.

Being the one of largest banks of the country with the maximum number of branches overseas, Bank of Baroda is well positioned to offer a variety of services, products and financial solutions to a cross section of clients. Our products suit our clients' banking requirements by virtue of being one of the best banking relationship networks both in terms of strength and spread among the Indian financial entities.

Products & Services

By Branches in India

The banking services at the International Business Branches (IBB), Non Resident Indian Branches, 115 Authorized Branches as well as more than 2600 other branches are provided for the benefit of Indian customers, corporations, NRI's, Overseas Corporate Bodies, Foreign Companies/ Individuals as well as Foreign Banks etc.

Services that target these groups include:

NRI Services

Foreign Currency Loans in India (FCNR Loans)

Export Finance / Services

Import Finance / services

Letter of Credit

ECB

EEFC accounts

RTGS

Correspondence Banking Services in India

55

All General Banking Services

Treasury Services

By Branches outside India

The international banking services of Bank of Baroda at its overseas branches are provided for the benefit of its Indian customers, local customers, NRI's, subsidiaries and joint ventures of Indian corporations operating out of India, foreign entities, multinational corporations, banks as well as customers around the globe.

Services that target these groups include:

1. All general Banking Services including Corporate/ Retail lending 2. NRI Services 3. Foreign currency credits to the Indian corporations 4. Arranging/ participating in the Syndicated loans of Indian corporations as well as rated

multinational corporations. 5. Correspondent Banking services to the Indian Banks/ corporations 6. Trade Finance (Bills Discounting) 7. International Treasury Services

The cross border foreign currency lending to Indian corporate, trade finance and treasury services are provided at the money center branches as well as the subsidiary in Hong Kong. General banking services are provided at all the branches/ subsidiaries/ joint ventures.

56

57

Bank of Baroda, one of the major public sector banks in India having a strong global

presence with a wide network of 61 overseas offices, including those of subsidiaries, spread

over 16 countries, is considered as a market leader in foreign exchange operations in India.

At present the Bank is having branches / offices in countries like USA, UK, Belgium, South

Africa, Hong Kong, UAE, Oman, Fiji Islands, Mauritius, Seychelles, Bahamas, Guyana,

Kenya, Uganda and Zambia.

The Bank has completed fifty years of operations in overseas territories and is poised

to expand its reach to countries like Tanzania and China, apart from consolidating its

overseas operations in those countries where the bank has already made its presence felt.

The modern state-of-the-art dealing room at its Specialized Integrated Treasury

Branch (SITB) at Mumbai provides the necessary wherewithal to its 115 designated

branches across the length and breadth of the country authorized to handle foreign

exchange business of its clientele. The bank has retained its primacy as a leading market

maker both in spot and forward markets, along with foreign exchange swap markets.

The forex dealing desk at the SITB is provided with all modern communication

facilities and is in the process of linking all its authorized branches via Reuters Automated

Dealing System, to provide on-line quotes for foreign exchange transactions.

Through its large network of authorized branches, the bank caters to the foreign

exchange needs of its clientele engaged in export and import trade and the SITB provides

rates for conversion of all major world currencies like U S Dollar, Sterling Pounds, Euro,

Swiss Francs, Japanese Yen and other exotic currencies. The services to the customers of

the Bank include hedging of foreign currency risks by providing forward covers and various

derivatives product

58

FCNR

FCNR Loans

Corporates can loans from the Banks who are authorised dealers. Bank of Baroda grants FCNR (B) Loans through its Position Maintaining Offices at Mumbai, New Delhi, Kolkata, Chennai and Ahmedabad.

The Indian corporates/ firms are allowed to raise the funds through foreign currency loans at the selected Indian branches within the prevailing policy guidelines of the Bank/ RBI.

Key Benefits

FCNR loans are beneficial to the corporates on account of following:

At times, it may entail lesser interest cost vis-à-vis Rupee borrowings. The borrower is not required to go to the International market for raising the funds as

foreign currency funds are made available in India reducing the cost of raising such funds.

Broad purpose of loans

Corporates are allowed to obtain foreign currency denominated loans in India under the above scheme for the following purposes:

1. For meeting working capital requirements in Indian Rupees. 2. By way of pre-shipment advances/ post shipment advances to the exporters. 3. Import of raw materials. 4. Import of capital goods. 5. Purchase of indigenous machinery. 6. Repayment of the existing Rupee Term Loan. 7. Repayment of any existing ECB's with the permission from RBI, Govt. of India.

59

EXPORT FINANCE

PACKING CREDIT

By way of pre-shipment advance for purchase, processing, manufacture, and packing goods meant for export, against lodgement of firm export orders and /or irrevocable letter of credit. The facility is normally secured by hypothecation/pledge of goods wherever possible and against ECGC whole turn over packing credit guarantee.

The advance which is available at a concession rate of interest must be liquidated only out of submission of export bills for negotiation/purchase etc. The period for which advances are given is to be determined according to the nature of the business/process involved subject to such maximum period as laid down by reserve bank of India.

LOANS AGAINST RECEIVABLES

These loans are made against exporter’s entitlements which are to be received from govt. authorities such as duly drawback claims etc. Such advances are granted normally for a period not exceeding 90 days to the extent of the actual amount receivables against ECGC guarantees at a concessional rate of interest.

Customer must execute a power of attorney favor of our bank to enable the bank to collect the amounts direct from the govt.by cheque in its name. Such type of finance is granted at pre shipment or post shipment stages. Appropriate ECGC guarantee cover is to taken in such cases.

ADVANCES AGAINST BILLS FOR COLLECTION

Overdrafts against export documents forwarded on collection basis(UFBCs). With ECGC cover, are granted to exporters at a concessional rate of interest which must be liquidated out of the proceeds of the relative UFBCs o realization within the stipulated period.

PURCHASED /DISCOUNT OF EXPORT BILLS (FBP/UFBP)

60

Finance is made available at the post shipment stage against approved bills on approved bills on approved parties abroad on whom satisfactory credit report is available with the branch with ECGC cover. Bills may be drawn on DA/DP terms in accordance with sanctioned terms and for a period, not exceeding maximum period laid down by the reserve bank of India/FEDAI.

INLAND LETTER OF CREDIT

Banks opens inland, back to back letter of credit on the strength of letters of credit received by exports from abroad .these back to back letter of credit are opened in favour of upcountry or local suppliers/manufactures of inputs and/or goods for export.

GUARANTEES

Bank issues guarantees for waiver of excise duty, due performance of contract, bid bonds, in lieu of cash security deposit, advance payment etc. Such a facility can be covered under the guarantee cover of ECGC.

POST SHIPMENT TERM FINANCE

Covers exports on deferred payment terms. Advance granted at the pre shipment stage ,if any , must be liquidated by means of post shipment term loans which in turn are liquidated in installments, by deferred payment letters of credit/guarantee of foreign banks favoring exporters.

Such advances are often participation advances with exim bank and other financial institution.

Financing of Exports

The following are main tasks performed by the export section of a foreign exchange dept.

a. Advising export letters of credit.b. Negotiating documents /under letter of credit.c. Extending pre shipment packing credit advances.d. Post shipment loans, against export bills sent on collection basis.(PSDL)e. Deferred payment exportsf. Purchasing /discounting of export bills(FBP/UFBP)g. Handling export bills on collection basis (FBC).

61

EXCHANGE CONTROL REGULATIONS REQUIRE THAT

Every person/firm/company engaged in export business in India should hold importer-exporter code number allotted by the office of director general of foreign trade (DGFT).and reserve bank of India.

Documents covering export from India should be routed through banks authorized to deal in foreign exchange.

In case of cash exports ,the full proceeds of the bill should be received in India, in an approved manner on the due date of payment or within six months from the date of shipment whichever is earlier.

In respect of consignment exports made to Indian owned warehouses abroad established with the permission of the reserve bank of India, a maximum period of 15 months is allowed for realization of export proceeds.

Any extension in this time limit requires the prior approval of the reserve bank of India.

Post-shipment Finance

The bank finance disbursed to an exporter after the date of shipment is termed as post shipment finance. The post shipment finance may be in the form of –

1. Negotiation of export documents under the letters of credit, opened by the overseas bank of repute(negotiating bank)

2. Purchase /discount of the export bills under the export contracts3. Advance against receivables from government of India4. Advance against consignment exports / undrawn / balances / Retention money.5. Advance against export bills sent for collection.

The bank in India have adopted the following::

1. Uniform custom and practice for documentary credits, ICC publication NO 500

62

2. Uniform rules for collection international chamber of commerce publication NO 522

3. Uniform rules for bank to bank reimbursements. ICC NO 5254. INCOTERMS [ICC PBLICATION NO-460,1990]

Generally, the following documents are required to be submitted to the bank for negotiation/purchase. The documents should be complete, correct, in full set and as required in terms of the LC contract. The bank is expected to scrutinise them properly to ensure the settlement of its claim by the reimburse/ issuing/ importer abroad:

1. Original letter of credit with amendments if any2. Bills of exchange3. Invoice and Packing list4. Transport documents in full set(bill of lading,airway bill etc)5. Original insurance policy in negotiable form, certificate of insurance6. Certificate of origin7. Consular invoice/ customs invoice8. Other documents if any

63

IMPORT FINANCE

Bank of Baroda provides various types of funding/ services to the importers for facilitating

the imports in the country. All the facilities are subject to the prevalent rules of the Bank/ RBI

guidelines. The various facilities provided are:

Collection of import bill.

Opening of Import L/Cs (Sight/ DA)

Financing of import by way of Foreign Currency Loans

Issuing Guarantees etc. on behalf of importers.

COLLECTION OF IMPORT BILLS

The import bills are collected through the 116 authorised branches at very competitive rates.

The Bank has correspondent relationship with reputed International Banks throughout the

world and can provide the services to importers who may be importing from any part of the

globe.

LETTER OF CREDIT

Bank of Baroda offers L/C facility for the purchase of goods in the international market. Being

a well-known international Bank of repute, the L/Cs of the Bank of Baroda are well accepted

64

in the International market. With the Letter of Credit of Bank of Baroda, importers can build

up better trust/ confidence in their suppliers and develop other business relationship at a

much faster pace. The vast network of Bank's overseas branches/ subsidiaries and

Correspondent Banks world-wide facilitate prompt & efficient services to the importers. The

L/C facility can be granted to the importers after assessing their requirement/ credit

worthiness/ financial strength and other parameters being to the satisfaction of the Bank.

BANK GUARANTEES

Bank of Baroda on behalf of importers/ other customers issues guarantees in favour of

beneficiaries abroad. The guarantees can be both Performance and Financial.

65

LETTER OF CREDIT

Sales of goods are contracted privately between buyer and seller and a contract of

sale comes into being, which, among other things indicates the description, quantity, price of

the goods, terms of delivery and the method of payment desired. The buyer will ask his bank

to open for his account a commercial documentary letter of credit in favour of the seller if this

is a requirement of the contract. Therefore, while a contract of sale is between a buyer and a

seller, a letter of credit is an arrangement between the buyer and his bank i.e. an

arrangement of payment. The bank in issuing a letter of credit will in turn be entering into

another form of contract, because the letter of credit is itself a contractual obligation of the

bank to the beneficiary, who is the seller.

LETTERS OF CREDIT ARE SEPARATE TRANSACTIONS FROM THE SALES AND

OTHER CONTRACTS ON WHICH THEY MAY BE BASED AND BANKS ARE IN NO WAY

CONCERNED WITH OR BOUND BY SUCH CONTRACTS.

DEFINITION OF LETTER OF CREDIT

In opening the credit, the bank substitutes its own superior standing for that of the

buyer. The seller will rely on the opening Bank's standing and look to the bank for payment in

accordance with the letter of credit terms. He need no longer be concerned with whether the

buyer pays to the credit opening bank or not.

66

A letter of credit is an accepted and popular instrument used in the finance of trade

both foreign and local, because it facilitates trade payment by making :

i. Finance available to the seller (Beneficiary)

ii. Credit available to the buyer (Opener)

iii. Ensures security to both.

Article 2 of Uniform Customs and Practice for Documentary Credits (1993 Revision)

states that the expressions "Documentary Credit(s)", mean any arrangement, however

named or described, whereby a bank (the "Issuing Bank") acting at the request and on the

instructions of a customer (the "Applicant") or on its own behalf,

(i) is to make a payment to or to the order of a third party (the "Beneficiary") or is to accept

and pay bills of exchange. (Draft/s) drawn by the beneficiary

OR

(ii) Authorizes another bank to effect such payment or to accept and pay such bills of

exchange (Draft/s)

(iii) Authorizes another bank to negotiate

Therefore, essentially, a letter of credit is a written but a conditional undertaking given

by the issuing bank on behalf of its customer, to the beneficiary that it will pay him the

amount stated in the credit PROVIDED documents specified in the letter of credit are drawn

and presented in STRICT CONFORMITY with the terms and conditions of the credit. The

advantages of such an arrangement are obvious. The beneficiary gets payment as soon as

he presents the documents immediately after shipment of goods. The opener is able to

ensure that payment will be made by bank to the beneficiary only if the documents which he

has stipulated are correctly made out, and presented in time. In documentary credit

operations, all parties concerned deal with documents and not with goods, services and/or

other performances to which the documents may relate.

67

IMPORTANT CONDITIONS

The bank issuing a letter of credit (issuing bank) is making credit available to the opener.

Therefore, his credit- worthiness must be ascertained.

When the amount of the letter of credit is expressed in the beneficiary's currency, the opener

and his bank run an exchange risk and vice-versa.

Though banks deal with documents and not with goods in letter of credit operations, the

bank's security for its advance is the documents of title to the goods. If the opener fails to

honour the bill, the bank's advance will be in danger if the goods supplied are defective or

sub-standard. Therefore, the business integrity and financial standing of the beneficiary

should also be ascertained. It is the responsibility of the issuing bank to ensure that trade

and exchange regulations (EXIM Policy guidelines and FEMA 1999 Regulations) are not

violated.

PARTIES TO LETTER OF CREDIT

Basically there are four parties to a letter of credit :

(i) the opener i.e. the applicant or buyer

(ii) the issuing bank

(iii)the beneficiary (the seller) and

(iv) the advising and/or negotiating bank.

68

There may be a confirming bank also, or the advising bank may play the roles of advising

bank, confirming bank as well as of negotiating bank.

TYPES OF LETTERS OF CREDIT

1. Revocable letters of credit

are very rarely used in trade today. Such credits contain no undertaking of the issuing bank,

or any legal obligations to give notice of cancellation or amendment. However, if any

documents had been negotiated prior to receipt of the notice of amendment/ or cancellation,

the negotiating bank

must be reimbursed. Refer to Article 8 of Uniform Customs (1993 Revision). A written

undertaking should be obtained from the customer that all such bills will be honoured by him.

2. Irrevocable letters of credit

are commonly used in foreign as well as local trade. They represent a definite legal

undertaking of the issuing bank to the beneficiary. Such credits cannot be cancelled or

amended without the written consent of all parties to credit. If the beneficiary rejects any

amendment, then the terms of the credit existing prior to the issuance of the amendment

continue to remain in force.

69

Article 6 of Uniform Customs (1993 Revision) requires that a letter of credit should clearly

indicate whether it is irrevocable or revocable. In the absence of such indication it is to be

treated as irrevocable letter of credit.

3. Confirmed and unconfirmed

An irrevocable letter of credit carries an undertaking of the issuing bank to honour drawings

there under. If the opening bank authorizes/ requests the advising bank also to give the

beneficiary a similar undertaking and the advising bank adds its confirmation to the letter of

credit, it is called a confirmed irrevocable letters of credit, thus bearing an undertaking of both

the issuing and advising banks. Refer Article 9 of Uniform Customs (1993 Revision). On the

other hand if the advising bank is not required to add its confirmation, the letter of credit is

called an irrevocable but unconfirmed letter of credit, thus bearing an undertaking only of the

issuing bank.

4. Transferable credit

When the beneficiary of credit is not the actual supplier or manufacturer, he requires such

credits to be opened, giving him the right to instruct the advising bank to make the Credit

available to third parties. The extent of transferability is now governed by Article 48 of

Uniform Customs (1993 Revision), which interalia provides that :

(a) it can be transferred only once unless otherwise stated in the Credit.

(b) only on the terms and conditions specified in the original Credit except for amount/ unit

price/ and validity which may be reduced/ curtailed.

5. Revolving credit

Such Credits, generally used in local trade. The Credit is opened for a stated amount which

becomes available again after the previous drawing has been honored by the buyer. The

Credits indicate the total permitted drawings thereunder during the period of validity. The final

validity and total drawing clauses are very important clauses in such credits. Opening of

import revolving LCs should as far as possible be avoided. However, in exceptional cases

they may be opened with adequate safeguards/ conditions (subject to strict compliance of all

Import Trade and Exchange provisions and guidelines) particularly with reference to

70

aggregate drawings under such LC and shipment dates etc., after seeking approval from

Regional/ Zonal Authorities.

6. Back to Back Credit

a. When a middle man enters into a contract to supply goods to be obtained from

suppliers but is unwilling to disclose their identity and the buyer is also unwilling to

open a transferable letter of credit, such Credits come into use. The irrevocable letter

of credit opened by the buyer is used by the beneficiary as security with his bank

against which it agrees to open letters of credit in favour of the actual supplier/

manufacturer. The terms of the back to back letters of credits will be almost identical

to the letters of credit received from the buyer except to the extent of amount, price

and delivery dates. The beneficiary will substitute his own invoices for negotiation

under the original letters of credit.

b. With effect from 1st April 2002, International Chamber of Commerce, Paris has issued

the eUCP as the supplement to UCP 500 (Verson 1.0). For details, reference may be

made to eUCP publication.

INTERNATIONAL STANDARD PRACTICES

a. Letter of credit appears to be a safe instrument for trade settlements but in certain

cases it fails to produce the desired results.

b. ICC Banking Commission appointed a task force to compile ISBP for examination of

documents drawn under a letter of credit. The task force came out with a report which

was approved by ICC Banking Commission in October 2002 and came out with the

publication titled as “International Standard Banking Practice for the Examination

of documents under Documentary Credit”

71

c. It should be noted that this publication (ISBP) is not an amendment to UCP ICC 500. It

discreetly addresses the issues that commonly arise but not expressly treated in UCP.

ECB

1. The commercial borrowings raised from the International Market outside India by any Indian legal entity registered under Companies Act, Co-operative Societies Act, including Proprietorship/ Partnership concerns, are called external Commercial Borrowings (ECBs.). The legal entities do not include the individuals, non-profit organizations and Trusts.

2. It is clarified that only those cooperative societies which are commercial in nature and whose accounts are up to date and have complied with the statutory guidelines without any qualification would be eligible to raise ECBs.

3. No financial intermediary viz. Bank, NBFC will be allowed access to ECBs under any route.

4. ECB availed by financial intermediaries need to be distinguished from those availed by corporates. Further more, banks have the facility.

A. to borrow from its head office or branch or correspondents outside India up to 25 per cent of its unimpaired Tier-I Capital or US$ 10 million, whichever is higher,

72

B. to borrow from its head office or branch or correspondents outside India without limit for the purpose of replenishing Rupee resources (not for investment in call money or other markets) and

C. to avail lines of credit from a bank / financial institution outside India without any limit for the purpose of granting pre-shipment / post-shipment credit to its constituents.

ECB can be accessed under two routes

(i) Automatic Route and(ii) Approval Route

AUTOMATIC ROUTE

ECB for investment in real sector -industrial sector, especially infrastructure sector in India, will be under Automatic Route, i.e. will not require RBI/Government approval.

Eligible borrowers

Corporates registered under the Companies Act except financial intermediaries (such as banks, financial institutions (FIs), housing finance companies and NBFCs) are eligible.

End-use

ECB can be raised only for investment (such as import of capital goods, new projects, modernization/ expansion of existing production units) in real sector - industrial sector including small and medium enterprises (SME) and infrastructure sector - in India.

Infrastructure sector is defined as

1. Power,2. Telecommunication,3. Railways,4. Road including bridges,5. Ports,6. Industrial parks and7. Urban infrastructure

Utilization of ECB proceeds is permitted in the first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSU shares.

Utilization of ECB proceeds is not permitted for on-lending or investment in capital market by corporates.

73

Utilization of ECB proceeds is not permitted in real estate. The term ‘real estate’ excludes development of integrated township as defined by Ministry of Commerce and Industry.

Parking of ECB proceeds overseas

ECB proceeds should be parked overseas until actual requirement in India.

Prepayment

Prepayment of ECB up to USD 100 million is permitted without prior approval of RBI, subject to compliance with the stipulated minimum average maturity period as applicable for the loan.Debt Servicing

The designated Authorized Dealer (AD) has the general permission to make remittances of installments of principal, interest and other charges in conformity with ECB guidelines issued by Government / RBI from time to time.

APPROVAL ROUTE

Eligible borrowers

Financial institutions dealing exclusively with infrastructure or export finance such as IDFC, ILFS, Power Finance Corporation, Power Trading Corporation, IRCON and EXIM Bank will be considered on a case-by-case basis.

RBI based on prudential norms as approved by the Government will also permit Banks and financial institutions, which had participated in the textile or steel sector-restructuring package, to the extent of their investment in the package and assessment. Any ECB availed for this purpose so far will be deducted from their entitlement.

Cases falling outside the purview of the automatic route limits and maturity period.

Recognized Lenders, All-in-cost ceilings, End-use, Guarantees, Security, Parking of ECB proceeds overseas, Prepayment, Refinance of existing ECB, Debt Servicing, Procedure are same as Automatic route.

74

Documents to be submitted to Authorized Dealers/ RBI/ Govt. of India for raising ECBs:-

An offer letter from the lender giving detailed terms and conditions.

If applicable, copy of the project appraisal report from a recognized financial institution.

The copies of relevant documents (wherever applicable) like approvals from Foreign Investment Promotion Board / Cabinet Committee on Economic Affairs (CCEA) / Clearance Environmental Clearance/Techno Economic Clearance from Central Electricity Authority.

Approvals are valid for initial period of –6- months, for telecom project–9- months and for Power projects –1- year. The approvals granted by the Govt. of India/ RBI can be extended for a further period of -3-month. At the expiry of the validity of the approval, fresh applications are required to be made.

The executed copies of the Loan Agreement are to be submitted to ECB Division of RBI for clearance, before the loan can be allowed to be withdrawn.

Benefits of ECBs

ECBs from international market will be an additional source for the Indian economy like development of infrastructure sector etc.

The cost of funds from the international market is expected to be cheaper than the domestic market and therefore will make available the funds to the Indian Corporates at International rates so as to make them competitive.

The raising of resources on long-term basis also adds to the forex reserves of the country.

Inflow of the foreign currency in the country.

Sources of ECB

The ECBs can be raised only from internationally acceptable and/or recognized lender such as:

Export Credit Agencies

75

Suppliers of Equipments Foreign Collaborators Foreign Equity holders International Debt Capital Market Banks and Financial Institution Commercial Borrowings from IFC/ ADB etc.

ECBs from unrecognized sources such as individuals, Sole Proprietorship/Partnership firms etc are not allowed

Foreign Currency Term Loan (FCTL)

The most common way of raising the ECB is through loans. Depending on the corporate and quantum of the loan the ECB through loans can be raised in the following ways:

• Bilateral Loans• Club Deal Loans• Syndicated Loans

Bilateral Loans

The single bank to the borrowers i.e. there is only two parties involved bank and borrower, hence the name bilateral given to these loans. These type of loans are normally granted to bank’s existing customers and are for a smaller amounts to the extend that bank is comfortable to take exposure singly on that borrower. The amount of the loan depends on the individual corporate, their size, standing, performance, and financial position, etc.

Club Deal Loans

Club deal loans are the loans where normally a small group of banks(three to eight – depending on the size of the loan) take the exposure on the borrower. There is no arranger in the club deal and the status of all the participating banks is equal.

Syndicated Loans

A syndicated loan is one in which minimum four to five banks Participants, each funding a certain portion of the loan. A syndicate of banks may be formed either before or after the loan agreement is signed and identities of the participants may changed during the life time of the loan subject to transfer assignment and participation provisions in the loan agreement.

76

EEFC ACCOUNTS

Indian exports have surged over the last decade owing to an unprecedented boom in

sectors like software, biotechnology, gems, jewellery, textiles etc. As a result of this, the

volume of inward remittances has also increased significantly. To shield the firms engaged in

regular export and import from the exchange rate fluctuations RBI has allowed parking of

foreign currency by exporters in an account designated as Exchange Earners Foreign

Currency Account (EEFC). EEFC accounts are Current Accounts held in foreign currency

with authorized dealers of foreign exchange in the country.

Exchange Earners' Foreign Currency Account (EEFC) is an account maintained in foreign

currency with an Authorised Dealer, i.e a bank dealing in foreign exchange.

77

the account is a Non-interest bearing current account.

A person resident in India may open the account.

Yes, one can credit 100 percent of his foreign exchange earnings into this account subject to

permissible credits and debits.

Permissible Credits

i) Inward remittance through normal banking channel, other than remittances received on

account of foreign currency loan or investment received from abroad or received for meeting

specific obligations by the account holder.

ii )Payments received in foreign exchange by a 100 per cent Export Oriented Unit or a unit in

(a) Export Processing Zone or (b) Software Technology Park or (c) Electronic Hardware

Technology Park for supply of goods to similar such unit or to a unit in Domestic Tariff Area.

iii) Payments received in foreign exchange by a unit in Domestic tariff Area for supply of

goods to a unit in Special Economic Zone (SEZ);

iv) Payment received by an exporter from an account maintained with an authorised dealer

for the purpose of counter trade. (Counter trade is an arrangement involving adjustment of

value of goods imported into India against value of goods exported from India in terms of

Reserve Bank guidelines);

v) Advance remittance received by an exporter towards export of goods or services;

vi) Payment received for export of goods and services from India, out of funds representing

repayment of State Credit in U.S. dollar held in the account of Bank for Foreign Economic

Affairs, Moscow, with an authorized dealer in India,

vii) Professional earnings including directors fees, consultancy fees, lecture fees, honorarium

and similar other earnings received by a professional by rendering services in his individual

capacity.

viii) Interest earned, if any, on the funds held in the account;

78

ix) Re-credit of unutilised foreign currency earlier withdrawn from the account

REAL TIME GROSS SETTLEMENT RTGS

The continuous settlement of payments on an individual order basis without netting debits with credits across the books of a central bank.

Basically, this is a system for large-value interbank funds transfers. This system lessens settlement risk because interbank settlement happens throughout the day, rather than just at the end of the day.

Real Time Gross Settlement (RTGS) is an online system for settling transactions of financial institutions, especially banks. RTGS systems are "push payment" systems with transactions initiated by the paying bank.

We can explain this with the help of an example:

79

If Bank A or one of its customers needs to pay $1000 to Bank B or one of its customers, Bank A initiates the transaction and Bank B is immediately paid $1000 "electronically" by Bank A. Examples of RTGS systems include CHAPS in the UK and Fed wire in the United States.

Each country has its own RTGS system. As mentioned above, CHAPS is used in the UK and Fed wire in the United States. Below is a listing of countries and their RTGS systems:

United States - Fed wire Canada - LVTS (Large Value Transfer System) Australia - RGTS UK - CHAPS

This "electronic" payment system is normally maintained or controlled by the Central Bank of a country. There is no physical exchange of money; the Central Bank makes adjustments in the electronic accounts of Bank A and Bank B, reducing the amount in Bank A's account by $1000 and increasing the amount of Bank B's account by the same. The RTGS system is suited for low-volume, high-value transactions. It lowers settlement risk, besides giving an accurate picture of an institution's account at any point of time. Such systems are an alternative to systems of settling transactions at the end of the day, also known as the net settlement system such as BACS. In the net settlement system, all the inter-institution transactions during the day are accumulated. At the end of the day, the accounts of the institutions are adjusted. Extending the example above, say another person deposits a check drawn on Bank B in Bank A for $500. At the end of the day, Bank A will have to "electronically" pay Bank B only $500 ($1000 - $500).

The implementation of RTGS systems by Central Banks throughout the world is driven by the goal to minimize risk in high-value electronic payment settlement systems. In an RTGS system, transactions are settled across accounts held at a Central Bank on a continuous gross basis. Settlement is immediate, final and irrevocable. Credit risks due to settlement lags are eliminated.

RTGS requires Core Banking to be implemented across participating banks. Any RTGS would employ two sets of queues: one for testing funds availability, and the other for processing debit/credit requests received from the Integrated Accounting System. All transactions would be queued and submitted for funds availability testing on a FIFO+Priority basis.

In India, this is initiated by RBI (Central Bank of India) and is available on weekdays only from 10:00am to 13:30pm. Fees for RTGS vary from bank to bank, but as mentioned earlier, both participating banks must have Core Banking in place to enter into such transactions. Core Banking enabled banks and branches have assigned RTGS 11-character alphanumeric codes, which are required for transactions along with recipient's account number.

Benefits of RTGS

a. Processing / settlement of fund transfer request / TT reimbursement on the same day will result in avoidance of interest claims by other Banks.

80

b. Transfer of surplus funds from current accounts with other banks through RTGS system will lead to better management of funds by our Bank and will result in more profitability for our bank.

c. Use of RTGS by RTGS enabled branch will reduce reconciliation entries under HOTT / IBTA. Reconciliation of entries under Baroda RTGS is transactions based without origination / movement of any transaction advices and are reconciled by IBO on T+1 basis.

CORRESPONDENT BANKING

The extensive worldwide network of branches of Bank of Baroda offers Correspondent Banking services to the Indian Banks as well as banks from other countries.

BOB’s branches are capable of providing the services that an international correspondent Bank can offer. All the branches of the Bank are well equipped to handle the business of Correspondent Banking.

The New York, Brussels and London Branches of the Bank are equipped with latest technology and are having trained and experienced staff for handling the maintenance of Nostro accounts in US$, Euro and GBP respectively.

The overseas presence of the Bank is further supported by a large number of correspondent Banks (more than 500) which gives Bank of Baroda access to every corner of the Globe.

81

The main services provided are

1. Collection of bills both Documentary and Clean.

2. Advising / confirming of L/Cs opened by Indian Banks.3. Discounting of Bills drawn under L/Cs as well as outside L/Cs.4. Maintenance of foreign currency accounts (Nostro in US$, Euro, GBP at New York,

Brussels and London respectively) for settlement of transactions (Link).5. Making foreign currency payments/ remittance on behalf of customers of Indian

Banks.

INTERNATIONAL TREASURY

Bank of Baroda has a strong presence in the Treasury Market in India as well as abroad. The overseas Money Centre Branches undertake the Forex treasury operations on behalf of the customers. All the Forex treasuries at the overseas money center branches are equipped with state of art technology, highly experienced and motivated staff with professional skills. These branches deal in all the major international currencies i.e. US$, GBP, Euro, Yen as well as other currencies. These branches 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) Forward Rate Arrangements (FRA's) Forex Money Market Operations

82

83

The various benefits of foreign operations of Indian banks particularly of bank of Baroda are as follows:

1. Exchange reserve increase/balance of payment

2. increase in the overall profit of the Bank of Baroda :

GLOBAL BUSINESS

31.3.2007 (RS)/cr

31.3.2006 (RS)/cr

ABSOLUTE CHANGE (RS)/cr

% change

DEPOSITS 1,24,915 93,662 31,253 33.37%

ADVANCES 83,621 59,912 23,709 39.57%TOTAL 2,08,536 1,53,574 54,962 35.79%

84

BUSINESSGROSS NPA

2.47% 3.90% - -

NET NPA 0.60% 0.87% - -NET PROFIT

1026 827 199 24.12%

3. Significant increase in overseas business

OVERSEAS BUSINESS

31-3-2007 (RS)/cr

31-3-2006 (RS)/cr

ABSOLUTE CHANGE (RS)/cr

% CHANGE

DEPOSITS 25,190 14,613 10,577 72.38%ADVANCES 16,358 9540 6818 71.46%TOTAL BUSINESS

41,548 24,153 17,935 72.02%

GROSS NPA

0.73% 1.31% ----- -----

NET NPA ZERO ZERO ----- -----

4. Many nationalised banks do not provide the facility of RTGS, bank of Baroda is one of the few banks which provides the facility of RTGS.

5. Through facilities like EEFC accounts exporters and importers can take the benefit of fluctuations in the exchange rates and exchange rate risks.

6. The extensive worldwide network of branches of Bank of Baroda offers Correspondent Banking services to the Indian Banks as well as banks from other countries.

7. ECBs from international market will be an additional source for the Indian economy like development of infrastructure sector etc.

8. The cost of funds from the international market is expected to be cheaper than the domestic market and therefore will make available the funds to the Indian Corporates at International rates so as to make them competitive.

85

9. Long term presence in market skilled and experienced staff is a key for the rapid growth of BOB’s Forex operations.

10.Huge network of overseas branches and vast network of correspondent banks has given the BOB a strong grass root fundamental strengths.

86

International trade in banking services is growing rapidly despite many barriers to trade. Consumer services are being established world wide and increasingly banking services are becoming globalized in much the same way that manufacturing is outsourcing overseas.

The manager of a banking organization can no longer ignore international competition in banking services, especially the globalization of back-room operations. Today’s Bank managers need a framework in which to develop a global service strategy. Addresses two questions which managers face when developing a global bank service strategy:

What are the factors that we can use to classify bank services in terms of their potential for moving globally; and How do these factors translate into strategies for the globalization of specific banking services?

The most common dimensions for classifying Bank’s Forex operations include consumer involvement and customization, complexity of inputs and outputs, and labour intensity.

PRODUCT INNOVATION AND PROCESS RE-ENGINEERING

With increased competition in the banking Industry, the net interest margin of banks has come down over the last one decade so for BOB also. Liberalization with Globalization will see the spreads narrowing further to 1-1.5% as in the case of banks operating in developed countries. Banks will look for fee-based income to fill the gap in interest income. Product innovations and process re-engineering will be the order of the day. The changes will be motivated by the desire to meet the customer requirements and to reduce the cost and improve the efficiency of service. All banks will therefore go for rejuvenating their costing and pricing to segregate profitable and non-profitable business. Service charges will be decided taking into account the costing and what the traffic can bear.

Similarly, Banks will look analytically into various processes and practices as these exist today and may make appropriate changes therein to cut costs and delays.

TECHNOLOGY IN BANKING

Technology can bring fundamental shift in the functioning of banks. It would not only help them bring improvements in their internal functioning but also enable them to provide better customer service.

87

Technology will break all boundaries and encourage cross border banking business. Banks would have to undertake extensive Business Process Re-Engineering and tackle issues like

How best to deliver products and services to customers

Designing an appropriate organizational model to fully capture the benefits of technology and business process changes brought about.

How to exploit technology for deriving economies of scale and how to create cost efficiencies, and

How to create a customer - centric operation model.

Technology solutions would make flow of information much faster, more accurate and enable quicker analysis of data received. This would make the decision making process faster and more efficient. For the Bank, this would also enable development of appraisal and monitoring tools which would make credit management much more effective. The result would be a definite reduction in transaction costs, the benefits of which would be shared between banks and customers.

Payment and Settlement system is the backbone of banking.

The present Payment and Settlement systems such as,

a) Structured Financial Messaging System (SFMS)

b) Centralized Funds Management System (CFMS)

c) Centralized Funds Transfer System (CFTS) and

d) Real Time Gross Settlement System (RTGS)

Will undergo further fine-tuning to meet international standards. Needless to add, necessary security checks and controls will have to be in place.

RISK MANAGEMENT AS A KEY FACTOR FOR BOB

88

Risk is inherent this rule. Rising global competition, increasing deregulation, introduction of innovative products and delivery channels have pushed risk management to the forefront of today’s financial landscape. Ability to gauge the risks and take appropriate position will be the key to success. It can be said that risk takers will survive, effective risk managers will prosper and risk averse are likely to perish. In the regulated banking environment, banks had to primarily deal with credit or default risk. As we move into a perfect market economy, we have to deal with a whole range of market related risks like exchange risks, interest rate risk, etc.

Operational risk, which had always existed in the system, would become more pronounced in the coming days as we have technology as a new factor in today’s banking even BOB is not an exception in that. Traditional risk management techniques become obsolete with the growth of derivatives and off-balance sheet operations, coupled with diversifications.

Building up a proper risk management structure would be crucial for the BOB in the future. Bank would find the need to develop technology based risk management tools. The complex mathematical models programmed into risk engines would provide the foundation of limit management, risk analysis, computation of risk-adjusted return on capital and active management of banks’ risk portfolio. Measurement of risk exposure is essential for implementing hedging strategies.

Risk management is an area the bank can gain by cooperation and sharing of experience among themselves. Common facilities could be considered for development of risk measurement and mitigation tools and also for training of staff at various levels.

Needless to add, with the establishment of best risk management systems and implementation of prudential norms of accounting and asset classification, the quality of assets in commercial bank will improve on the one hand and at the same time, there will be adequate cover through provisioning for impaired loans. As a result, the NPA level of BOB is expected to come down significantly.

Mission SMEs - a key growth driver

This sector is at last getting the attention it deserves after a long time. The contribution of this sector has often been under-estimated as they have been unsung heroes. Actually the sector contributes 40% of then industrial output and over one third of exports. It provides the largest employment after agriculture and covers 8000 products. It can be termed as the “birthplace of the enterprise”.

In the past few years, SME sector in Ahmedabad has emerged more competitive and efficient and knowledge-based industries are likely to acquire greater prominence. SMEs are dominating in industry segments such as Pharmaceuticals, Information Technology and Biotechnology. With SME sector emerging as a vibrant sector of the Indian economy, flow of credit to this sector has gone up significantly.

89

BOB will have to sharpen their skills for meeting the financial needs of this segment. Some of the Banks may emerge as niche players in handling SME finance. Flow of credit to this Sector will be guided purely by commercial considerations as Banks will find SMEs as an attractive business proposition.

Strategies

Multi-country expansion

Importing customers

Following your customers

Service unbundling

Beating the clock

Market penetration: On the basis of long term relationship

Branch network to support clients at any location

Use integrated solution for international and domestic operations.

Procedural delays and bottlenecks can be removed using IT infrastructure.

90

91

1. Marketing of strong network of overseas branches

Bank of Baroda has a strong global presence in the overseas market with 61 branches in 21 countries; it can be an extraordinary advantage for BOB. It can market this strength of reaching and supporting its clients at any location of the world in a way, so it can capture more clients for export and import business in Ahmedabad region.

2. Canvassing of Deposits from NRIs through overseas network of branches.

Bank of Baroda is pioneer in providing NRI services in the financial and banking sector. In yet another customer centric initiative, Bank has launched a deposit scheme for investors with interest rates at 25-30 bps over the interest rate swap (IRS) rates for 3, 4 and 5 years period of term deposits. It can attract the huge numbers of NRIs of Ahmedabad region.

The deposit scheme has been designed keeping in view the needs of NRI customers and understanding their requirements for deployment of funds with higher return.

The ‘Baroda Term Deposit’ is offered at Bank’s major overseas centres excluding USA. The rate of interest on this deposit is better than rate currently offered in the market.

Bank can encourage the customers through above mentioned advantages by making them unlock the hidden potential of their fixed deposits with BOB with this plan developed specifically for providing loans/overdraft against their security of Foreign Currency denominated fixed deposits placed with BOB.

3. ECB Loans through overseas branches at globally competitive rates.

BOB is very active and is a leading player in granting and arranging various forms of foreign currency facilities through ECB route for the Indian Corporates. BOB focuses on all type of foreign currency credit requirements of Indian corporates in arranging the Foreign Currency Loans.

As there are so many small and medium corporates operating in Ahmedabad region, BOB has a good opportunity for being helpful to them in raising money through its vast overseas network at Globally Competitive Rate rates.

BOB has a few decades of experience in arranging foreign currency loans. This long experience and wide presence across the globe brings leverage to BOB to understand the ECB market better thus offer best terms to the clientele of Ahmedabad region.

92

International Merchant Banking Cell (IMBC) has been set up at BCC; Mumbai to pay focused attention to the international merchant banking needs of Indian corporates with special emphasis on Externational Commercial Borrowing can be very helpful in expanding forex business in Ahmedabad and whole Gujarat region.

4. Tapping the mergers and acquisitions

Mergers and acquisitions are a common feature of the global business. There has been a marked increase in merger activity since 1990s.the main drivers of such deals are the changing market conditions, which requires business to group their activities and deregulation which lead to consolidation.

BOB can target these mergers and acquisitions market by providing finance as per RBI guidelines to fund these takeovers and acquisitions.

5. FCNR deposits by which bank can offer FCNR denominated loans at LIBOR + SPREAD rates.

Facilities for loans/overdraft can be advanced against FCNR Fixed deposits in USD, GBP, EUR or YEN etc. It can enhance the business of BOB as there are so many opportunities waiting in Ahmedabad region.

6. Providing PCFC to small exporters of Ahmedabad region

Bank of Baroda provides PCFC in 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.

7. Loans to EOUs

There are many Export Oriented Units such as Textiles, Pharmaceuticals, Chemicals, Engineering goods, Metal Industries, Consumer goods and Agro based industries operating in Ahmedabad region as well as in Gujarat.

So BOB can target these EOUs by providing all integrated financial services, understanding their financial needs and requirements.

8. Seminars and Workshops in Ahmedabad

The bank should organize seminars and workshops for educating the small and medium scale exporters for leveraging its foreign business. BOB can arrange seminars highlighting its various services for export-import to attract new customers as well as to educate its existing customers for better performance.

It should also provide them with regular publications and literatures to make them aware of new services and creating a facilitating environment for promoting trade and investment.

93

9. Participation in Overseas Trade Fairs to promote new exporters going global.

BOB can utilize its overseas branch network efficiently with a view to promote international trade and strengthen economic linkages; BOB can participate and showcase its products and services in the overseas trade fairs and through this it can help the small and medium entrepreneurs of Ahmedabad.

10. Financing R&D and new product development for Pharmaceuticals and Automobile Industries in Ahmedabad region

As there are so many small pharmaceutical companies and Automobile industries involved in international business in Ahmedabad region, BOB can easily target these small companies and provide them special financial services to promote import and exports of their products.

11. BOB can provide Export Marketing Services (EMS) to SMEs of Ahmedabad region

BOB can use its widespread overseas branch network to help local exporters who are unable to launch their product in totally new foreign market due to lack of proper information of overseas market.

BOB can provide them assistance in establishing their product in overseas markets through this EMS, starting from identification of prospective business partners to facilitating placement of final orders.

12. BOB should also provide services like Factoring and Forfeiting to its customers doing imports and exports, to enhance its forex operations in Ahmedabad region.

13. Utilization of large overseas network for tie ups with international payment gateways like VISA, MASTERCARD for payments to foreign nationals.

94

95

FUTURE ACTION POINTS ARISING OUT OF OUR STUDY

1. Bank will have to adopt global standards in capital adequacy, income recognition

and provisioning norms.

2. Risk management setup in Banks will need to be strengthened. Benchmark

standards could be evolved.

3. Payment and settlement system will have to be strengthened to ensure transfer of

funds on real time basis eliminating risks associated with transactions and

settlement process.

4. Regulatory set-up will have to be strengthened, in line with the requirements of a

market-led integrated financial system

5. Bank will have to adopt best global practices, systems and procedures.

6. Bank may have to evaluate on an ongoing basis, internally, the need to effect

structural changes in the organization. This will include capital restructuring through

mergers / acquisitions and other measures in the best business interests. IBA and

NABARD may have to play a suitable role in this regard.

7. There should be constant and continual up gradation of technology in the Banks,

benefiting both the customer and the bank. Banks may enter into partnership

among themselves for reaping maximum benefits, through consultations and

coordination with reputed IT companies.

96

8. The skills of bank staff should be upgraded continuously through training. In this

regard, the banks may have to relook at the existing training modules and effect

necessary changes, wherever required. Seminars and conferences on all relevant

and emerging issues should be encouraged.

9. Bank will have to set up Research and Market Intelligence units within the

organization, so as to remain innovative, to ensure customer satisfaction and to

keep abreast of market developments. Bank will have to interact constantly with

the industry bodies, trade associations, farming community, academic / research

institutions and initiate studies, pilot projects, etc. for evolving better financial

models.

97

BIBLIOGRAPHY

Books

VOLUME-1O OF BOB, 2003

SHAKUN EXIM CORPRATION

FEDAI GUIDELINES

FEMA 2000

Magazines & News Papers

Indian Economic review, January 2006, Forex

The Economic times

Business Standard

Business Line

Websites

www.rbi.org.in

www.fedai.com

www.forexstreet.com

www.bankofbaroda.com

www.fema.com

98

99