Overview of International Banking Business

Gamut of International Banking Business

Facilitating and / or financing Cross Border Transactions relating to:

- Trade (Exports / Imports)

- Private Remittances (Inward / Outward),

including those on account of NRIs

Balance of Payments

Current Account:• Trade Account – Merchandise Export / Import• Invisibles – inward / outward remittances,

including receipts / payments o/a of services export / import

Current A/C - deficit/surplus Capital Account: Inflow / outflow of Capital / Investments (FDIs /

FIIs) Capital A/C surplus / deficit Reserves: net increase / decrease

EXPORTS

INVISIBLE RECEIPTS INVISIBLE

PAYMENTS

TRADE DEFICIT

IMPORTS

CAPITAL PAYMENTS

GROWTH IN RESERVES

Currency inflow/outflowCurrency inflow/outflow

CA DEFICIT

CAPITALRECEIPTS

CURRENT ACCOUNT

RECEIPTS• SUPPLY OF FOREX• For export of GOODS• For export of SERVICES• RECEIPTS FROM

PROFITS, DIVIDENDS, INTEREST, ROYALTIES, ETC EARNED ABROAD

PAYMENTS• DEMAND FOR FOREX• For import of GOODS• For import of

SERVICES• PAYMENT OF PROFITS,

DIVIDENDS, INTEREST, ROYALTIES, ETC TO FOREIGN COUNTRIES

CAPITAL ACCOUNTINFLOWS FROM

FOREIGN COUNTRIES

SUPPLY OF FOREX

• BORROWINGS• DIRECT INVESTMENT• PORTFOLIO

INVESTMENT

OUTFLOWS TO

FOREIGN COUNTRIES

DEMAND FOR FOREX• LENDINGS• DIRECT INVESTMENT• PORTFOLIO

INVESTMENT

FOREX BUSINESS• Each country has a Central Bank / Agency.Each country has a Central Bank / Agency.

• It regulates inflows and outflows of FCs.It regulates inflows and outflows of FCs.

• Each country has certain regulations about who is Each country has certain regulations about who is authorised to convert the currencies.authorised to convert the currencies.

• In India RBI has the regulatory powers under FEMA.In India RBI has the regulatory powers under FEMA. It authorises commercial bank branches to It authorises commercial bank branches to conduct foreign exchange business.conduct foreign exchange business.

- Authorised dealers in Foreign Exchange.- Authorised dealers in Foreign Exchange.

EXCHANGE RATE MECHANISM

EXCHANGE RATE IS THE RATE OF CONVERSION OF ONE CURRENCY IN TERMS OF ANOTHER CURRENCY

EXCHANGE RATE MECHANISM

• CONVERSION CAN BE ON ACCOUNT OF:

EXPORT RECEIVABLESIMPORT PAYABLESDISBURSAL OF FOREX LOANREPAYMENT OF FOREX LOANFOREIGN INVESTMENT

WHAT FACTORS AFFECT EXCHANGE

RATE MOVEMENTS?

• POLITCAL

• ECONOMIC

• SPECULATIVE

FEMA PROVISIONS

REMITTANCES

Scope of FEMA

• Regulations Applicable to Resident Individuals

• Regulations Applicable to Resident Corporates Entities

• Regulations Applicable to Non-Resident Individuals

• Regulations Applicable to Non-Resident Corporates & Other Entities

Declaration Under FEMA, Section 10(5)

• Three Types of Declarations:• For Regular Transactions: Take the Full

Declaration.• For Form A2 Transactions : Total forex

purchased/remitted during calendar year and purpose.

• For Regular Corporates: One time declaration : ‘I/We declare that all foreign exchange transactions as may be entrusted by me/us to the bank from time to time will be in strict conformity with FEMA.”

FEMA Transactions

• Current Account Transactions - Sec.5

(regulated by GOI in consultation with RBI)

• Capital Account Transactions – Sec.6

(regulated by RBI in consultation with GOI)

(The Regulations for transfer of assets outside India by a person whether resident in India or not are given in the Notifications No. FEMA 13/2000-RB and FEMA 21/2000-RB of May 3, 2000.)

Current Account Transactions

• Generally, current account transactions are those which are routinely undertaken in connection with day to day affairs of business or in our own life style;- these transactions should not create an asset or liability situation.

- Sec.2(j) defines Current Account transactions as those which are not Capital Account transactions

CURRENT ACCOUNT• RECEIPTS• EXPORT of:

GOODS,

SERVICES,• RECEIPTS FROM:

PROFITS, DIVIDEND, INTEREST, ROYALTIES, ETC EARNED ABROAD

• PAYMENTS• IMPORT of:

GOODS,

SERVICES,• REMITTANCE OF:

PROFITS, DIVIDENDS, INTEREST, ROYALTIES, ETC TO FOREIGN COUNTRIES

Examples Of Current Account Transactions specified in Sch. III (cont.)

• Remittance for maintenance of close relatives abroad,

i) Up to net salary (after deduction of taxes, contribution to provident fund and other deductions) of a person who is resident but not permanently resident in India, and who –

(a) is a citizen of a foreign State other than Pakistan; (b) is a citizen of India, who is on deputation to the office or branch or subsidiary or joint venture in India of such foreign company

ii) Up to USD 100,000 per year, per recipient, in all other cases (a person resident in India on account of his employment or deputation of a specific duration or for a specific job or assignment – the duration of which does not exceed 3 years, is a resident but not permanently resident )

Sale of exchange

• Form – A2.

• Simplified application cum declaration.

• Self declaration – onus on applicant.

• Business visit includes attending conference and specialised training.

• Payment in rupees for sale of exchange by bank.

Sale of foreign exchange for travel purpose

• Out of overall forex sold to a traveller, exchange in the form of foreign currency notes and coins may be sold up to the following limits

- to travellers to countries other than Iraq, Libya, Iran, Russian Federation and other republics of CIS – not exceeding USD 3000 or its equivalent

- to travellers proceeding to Iraq or Libya – not exceeding USD 5000 or its equivalent

- travellers proceeding to Iran, Russian Federation and other Republics of Commonwealth of Independent States – full exchange may be released

Sale of foreign exchange for travel purpose

• Authorised Dealers may accept payment in cash up to Rs. 50,000 (Rupees fifty thousand only) against sale of foreign exchange for travel abroad (for private visit or for any other purpose). Wherever the sale of foreign exchange exceeds the amount equivalent to Rs.50,000, the payment must be received only by

• (i) a crossed cheque drawn on the applicant’s bank account, or

• (ii) crossed cheque drawn on the bank account of the firm/company

• sponsoring the visit of the applicant, or • (iii) Banker’s Cheque / Pay Order / Demand Draft or

Sale of foreign exchange for travel purpose (cont.)

• (iv) Debit / credit / prepaid cards provided • a) KYC/AML guidelines are complied with • b) sale of foreign currency / issue of foreign

currency TCs is within the limits (credit / prepaid cards) prescribed by the bank and

• c) the purchaser of foreign currency / foreign currency TCs and the credit / debit / prepaid card holder is one and the same person.

• Note: Where the rupee equivalent of foreign exchange drawn exceeds Rs 50,000 either for any single drawal or more than one drawal reckoned together for a single journey/visit, it should be paid by cheque or draft.

Surrender of exchange

Unspent foreign exchange brought back to India should

be surrendered within 180 days from date of return.

Exchange so brought back can be used for subsequent

trips abroad.

Returning traveller also permitted to retain FCTCs &

FCNs up to USD 2000 and foreign coins without limit.

• Returning traveler may deposit unspent forex in his RFC(D) A/C

Trade Payment Methods

• Cash (Advance Payments)

• Clean / Documentary Collection

• Open Account

• Letter of Credit / Documentary Credit

• Standby Letter of Credit

THE ADVANCE PAYMENT

CHARACTERISTICS• made at the confirmation of the order or

signing of the international sales contract (in advance).

• the risk is taken by the importer / purchaser• Non-requirement of any shipping document

or

shipment proof at the time of making the remittance.

Advance Payment

• Advance payment for Imports.

• Advance payment for Exports.

• (Both need to comply with FEMA provisions)

COLLECTION

• Definition: Handling by banks of documents in accordance with instructions received.

• Governed by: Uniform Rules for Collection (URC), ICC publication URC 522

• the risk is taken by seller / exporter.

Letter of Credit

An arrangement by means of which a bank (issuing bank) acting at the request of a customer, or on its own behalf (applicant) undertakes to pay to a third party (beneficiary) a pre-determined amount by a given date according to agreed stipulations and against presentation of stipulated documents

LETTER OF CREDIT

UCPDC – 600 Edition effective from 1st July 2007

Credit means any arrangement that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.

Letter of Credit

• LC- provides a means of payment for goods & services supplied by a seller to a buyer-

• L/C- commitment or promise from Buyer’s Bank to pay to Seller once seller has met all the terms and conditions of L/C

• LC - ensures payment to seller (and delivery of goods/services to buyer?)

• L/C assures payment against presentation of stipulated documents/compliance with agreed stipulations

Letters of Credit Facilitates trade – domestic & international Helps seller to get immediate payment though

credit is extended by him (suppliers’ credit) Helps in reducing W/C requirement for buyer Also helps in reducing immediate outlay of

funds for banks Bank lends its creditworthiness to transaction

for which it charges the applicant

Standby Letters of Credit

• SLC- commitment/promise of Buyer’s Bank to pay seller once seller has met all terms and conditions of SLC

• SLC- guarantee of payment from Buyer’s Bank only if Buyer defaults on payment

• To invoke Buyer Bank’s commitment under SLC, Seller would be required to present to Issuing Bank sight draft / written statement / other documents as specified in SLC, certifying / evidencing that Buyer has failed to make payment on the shipment secured by SLC

Difference between LC and SLC

• LC covers a performance situation

• SLC covers non-performance situation

Letter of Credit

• Three main contracts underlying LC - Sale Contract between Buyer &

Seller - Application-cum-Guarantee between

Applicant(Buyer) and Issuing Bank - LC itself (contract between Issuing

Bank and Beneficiary/Seller) ( LC independent of other two contracts)

Parties to a Letter of Credit

• Applicant (Buyer)• Issuing Bank (opening bank)• Beneficiary (Seller)• Advising Bank• Confirming Bank• Negotiating Bank / Paying Bank• Reimbursing Bank• Second Beneficiary

LC Mechanism

Codified rules governing LC transactions are contained in ICC Publication No. 600- Uniform Customs & Practices of Documentary Credits.

Mechanics of Documentary Credit

IMPORTER EXPORTER

CONTRACT

OPENINGBANK ADVISING/

SHIPPINGCOMPANY

GOODS

DOCS

DOCUMENTS

OPEN CREDIT

DOCUMENTS

PAYMENT PAYMENT

GOODS

DOCS

NEGOTIATINGBANK

International Banking Operations

• Establishment of Correspondent Relations with overseas banks

• Establishing presence abroad by way of: - overseas branches, representative

offices, overseas subsidiaries, etc to capture business available from the Indian diaspora (NRIs / PIOs), as also the business of Indian companies operating abroad.

Organistional Structure of SBI for Managing /

Growing International Banking Business

Current Organization Structure

39

40

SBI Overseas Network Growth Over the Years

Year No. of Foreign Offices

March 2005 54

March 2006 70

March 2007 83

March 2008 84

March 2009 92

March 2010 142

March 2011 156

March 2012 173

India’s Trade Performance

• Exports cross $300 billion target, trade deficit zooms to $185 billion for the year 2011-12:

• Exports ………………… USD 303.7 bn• Imports ………………… USD 488.6 bn• Trade Deficit ………….. USD 184.9 bn• Exports grew …………. 21%• Oil Imports grew ………46.88% (to USD 155.63 bn)

• Non-Oil Imports ………26.23% (to USD 263.80 bn)• Gold & Silver Imports grew ……. 44.4% (to USD 61.5 bn)

EXPORT FINANCE

PRE-SHIPMENT CREDIT

POST-SHIPMENT CREDIT

Post shipment finance - extended after shipment to bridge the time lag between the shipment of goods and realization of proceeds

Pre shipment finance or Export Packing Credit (EPC) – extended as working capital for purchase of raw materials, processing, packing, transportation and warehousing.

Export Finance Products

• Export Credit in Rupees

- pre-shipment & post-shipment

• SBI Exporters Gold Card Scheme

- pre-shipment & post-shipment

• Export Credit in Foreign Currency

- pre-shipment (PCFC) & post-shipment (EBR)

Regulations /Guidelines to be taken care of

• 1) RBI directives. (Time norms, period, interest, liquidation, documentary evidence, refinance.)• 2) Foreign Trade Policy provisions & procedures.• 3) Bank’s internal guidelines. (CPPD & FD circulars).• 4) ECGC guidelines. • 5) Exchange Control Regulations (FEMA Provisions.)• 6) FEDAI Rules.• 7) UCPDC / URC provisions.