UNIVERSITY OF MUMBAI

RAYAT SHIKSHAN SANSTHA'S

KARMAVEER BHAURAO PATIL COLLEGE

VASHI, NAVI MUMBAI - 400703
A PROJECT REPORT ON

FOREIGN EXCHANGE BANKING IN BANK OF

BARODA
SUBMITTED BY
MAYUR D. PARAB
PROJECT GUIDE:-

PROF. Ataf Deshmukh

IN PARTIAL FULFILLMENT FOR THE COURCE OF
BACHELOR OF BANKING AND INSURANCE (B.B.I.)
SEMISTER V
ACADEMIC YEAR 2016-2017

DECLARATION
I, MAYUR DATTARAM PARAB student of KARMAVEER BHAURAOPATIL,
VASHI Studying in TY.B.COM BANKING AND INSURANCE (SEMESTERV)
hereby declare that I have completed project report on "FOREIGN EXCHANGE
BANKING IN BANK OF BARODA and has not been submitted to any other
university or institute for the award of any degree, diploma etc. The information is
submitted to me is true and original to the best of my knowledge.

Date:
Place : Vashi, Navi Mumbai

(Name & Sign of Student)

ACKNOWLEDGEMENT
I would like to extend my sincere Gratitude to all those people who helped me in the
successful completion of my project entitled FOREIGN EXCHANGE BANKING IN
BANK OF BARODA First and foremost I wish to take this opportunity of express my
deep sense of gratitude to prof. Ataf Deshmukh More for her valuable guidance in this
endeavor. She has been a constant source of inspiration and I sincerely thank her for
her suggestions and help to preparation this project.
I am grateful to our coordinator prof. C. D. Bhosale and H.O.D prof. Archana mam
for giving me valuable information regarding project.
Special thanks to my parents who have always stood by me I also wish to thank
my friends for their constant support and assignment to make this project worth
presentation before you.

RAYAT SHIKSHAN SANSTHA'S

KARMAVEER BHAURAO PATIL COLLEGE

VASHI, NAVI MUMBAI - 400703

CERTIFICATE
This is to certify that MAYUR DATTARAM PARAB student of B.B.I. (banking &
insurance) SEMISTER V has completed her project on FOREIGN EXCHANGE
BANKING IN BANK OF BARODA And has submitted a satisfactory report under the
guidance of Ataf Deshmukh in the partial fulfillment of B.B.I. (banking & insurance)
courses of university of Mumbai in the academic year 2016-2017.

--------------------------ProjectGuide

----------------------------Coordinator

-----------------------------------------University Examiner

--------------------------Principal

INDEX
CHAPTER 1 INTRODUCTION OF THE STUDY
1.1INTRODUCTION
1.2OBJECTIVE OF THE STUDY
1.3

IMPORTANCE OF STUDY

1.4

REASEARCH METHODOLOGY

1.4.1 TYPE OF RESEARCH

SECONDARY DATA

0-9
9-10
11-12
12-13

CHAPTER 2 PROFILE OF THE ORGANISATION

2.1 INTRODUCTION

13-14
14-15

2.2 HISTORY
2.3 VISION, MISSION AND LOGO

15-16

2.4 RECOGNITION

16-17

CHAPTER 3 RESEARCH STUDY OF MAIN TOPIC

3.1 FOREIGN EXCHANGE MARKET
3.2 WHAT DOES FOREIGN EXCHANGE
INVOLVES
3.3 WHAT DOES FOREIGN EXCHANGE
PROVIDE

CHAPTER -4

17-18
18-19
19-20

CURRENCY AND EXCHANGE RATES

ARITHMATIC
4.1

TOP 6 MOST TRADED CURRENCY

4.2 FACTORS AFFECTING CURRENCY

TRADING
ECONOMIC FACTOR
POLITICAL CONDITION
MARKET PHYCHOLOGY
4.3

EXCHANGE RATES
DEFINATION
DIRECT QUOTE
INDIRECT QUOTE

4.4 FACTORS AFFECTING EXCHANGE

RATES

20-22
22-24

25-26

26-30

CHAPTER -5

ROLE OF FOREIGN EXCHANGE IN GLOBAL

ECONOMY
5.1 ROLE OF BANKING INDUSTRY
5.2 CLOBAL PRESENCE OF BANK OF
BARODA
WIDE COLBAL NETWORK

30-31
31-36

INDIAN NETOWRK
5.3 INSTRUMENTS OF FOREIGN EXCHANGE
MARKET

CHAPTER
-6

6.1 FOREIGN EXCHANGE

OPERATION UNDERTAKEN BY
BANK OF BARODA

36-40

40-62

62-68
6.2 BEBEFITES OF FOREIGN
EXCHANGE
CHAPTER
-7

CONCLUSION AND SUGGESTIONS

68-69

CHAPTER
-8

BOBLOGRAPHY

69-70

CHAPTER 1

1.1 INTRODUCTION TO FOREX BANKING

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.

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 rates system at different
times

1.2 OBJECTIVE OF STUDY

To study the Foreign Exchange Operation in Bank of Baroda.
To study The Bank of Baroda Functions or Plays an important
role in banking sector.
To study about how to overcome the Inflation and Deflation in
Bank of Baroda.
To study about Taxation Policy in Bank of Baroda.

1.3 IMPORTANCE OF STUDY

Review of International Comparative Management Special Number 1/2011 291 THE
IMPORTANCE OF BANKS IN FOREIGN EXCHANGE AND THE IMPLICATIONS OF
10

THE CURRENCY RISK OVER THE BANK MANAGEMENT Vasile DEDU Florin
Alexandru

DUNA

The

Bucharest

Academy

of

Economic

Studies,

Romania

KEYWORDS: currency market, financial markets, currency risk, bank management,

globalization and internationalization, transaction, exchange, derivatives implications of
currency risk The role of banks in the development of the currency market The
concentration and the role of the banks in the development of the currency market
represents the first element on influencing the major players and their strategies on a
global scale. The currency market is considered the system of the relations between
financial and currency exchanges explained by the relation of buying and selling
currency or buying-selling deposits throughout foreign coins. This market is also called
FOREX (Foreign exchange market), being the biggest financial market in the world.
ABSTRACT The concentration and the role of the banks in the development of the
currency market represents the first element on influencing the major players and their
strategies on a global scale. The currency market is considered the system of the
relations between financial and currency exchanges explained by the relation of buying
and selling currency or buying-selling deposits throughout foreign coins. This market is
also called FOREX (Foreign exchange market), being the biggest financial market in the
world. The overcome of borders and the globalization of markets and countries
conducted to the internationalization of monetary markets that have great implications in
the currency risk of the banks. This paper aims to highlight the main features of the
Forex currency market in the light of the extraordinary needs and ability of the banks
and the financial system to assure the stability, which not only support the economy but
also develop a complex sistem of instruments, transactions - both in the capital market
and especially on the currency market - but also by products and derivatives in order to
complete the proper satisfaction of clients and other banks. Next to these we add an
imminent importance is established by the currency risk, which tend to ensure stability
in the current crisis and understanding the tools and policies in global banking.

1.4 RESEARCH METHOLODOGY

11

The study was conducted by the means of personal interview with respondents and the
information given by them were directly recorded on questionnaire. For the purpose of
analyzing the data it is necessary to collect the vital information. There are two types of
data, this are-

1.4.1TYPES OF RESEARCH
SECONDARY DATA:Secondary data is collected from newspaper, etc.

Websites
www.forexstreet.com
www.bankofbaroda.com

E.g.; social networking sites, books, newspaper, etc.

12

CHAPTER 2
PROFILE OF THE ORGANISATION

13

2.1 INTRODUCTION
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.
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 sectors 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.

2.2 HISTORY OF THE BANK

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.

Based on 2014 data, it is ranked 801 on Forbes Global 2000 list it has total
assets in excess of 3.58 trillion, a network of 5307 branches in India and
14

abroad, and over 8000 ATM s. BOB Capital Markets (BOBCAPS) is a SEBIregistered investment banking company based in Mumbai, Maharashtra.[11] It is a
wholly owned subsidiary of Bank of Baroda.[12] Its financial services portfolio
includes initial public offerings, private placement of debts,
corporate restructuring, business valuation, mergers and acquisition, project
appraisal, loan syndication, institutional equity research, and brokerage.

2.3 VISION, MISSION, AND LOGO

VISION:
My BANK OF BARODA
My customer first
My BOB : First in customer satisfaction

MISSION STATEMENT
To be a top ranking National Bank of International Standards committed to
augmenting stake holders Value through concern, care and competence.

LOGO
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 BOBs new logo is a

15

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 BOBs 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.
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.

2.4 AWARDS AND RECOGNITION IN FOREIGN BANKING

Bank of Baroda conferred best public sector bank Globally
Business World Best Bank 2011
Bank of Baroda won National Award for its performance in the
implementation of Prime Ministers Employment Generation Program me
(PMEGP) scheme for the year 2012.
Leading Public Sector Bank in Global Business Development category
16

 Most effective bank in Kenya 2011

CHAPTER 3

RESEARCH STUDY ON MAIN TOPIC

3.1 FOREIGN EXCHANGE MARKE

17

any For 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.
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
The exchange foreign 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.
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 interbank 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.

18

3.2 A FOREIGN EXCHANGE 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

3.3 FOREIGN EXCHANGE PROVIDES WITH

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.

19

CHAPTER 4

CURRENCY AND EXCHANGE RATES ARITHMATIC

4.1 TOP SIX MOST TRADED CURRENCY

20

Rank

Currency

ISO 4217
Code

Symbol

United States dollar

USD

Eurozoneeuro

EUR

Japanese yen

JPY

British pound sterling

GBP

5-6

Swiss franc

CHF

21

4.2 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 FACTOR

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.

Political conditions
22

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

Economic numbers:
23

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]

24

4.3 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

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.

25

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

Iranian Rial

Pakistani Rupees

Sri Lankan Rupees

4.4 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
26

the demise of the Bretton Woods System in 1971. At the monetary conference held on
December 17 and 18, 1971, a new arrangement, popularly 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--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--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.

(III) Fiscal policy

27

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--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 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.

28

(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 havencurrencies. 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--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.

(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--vis local currency will go up. However, if

29

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

30

CHAPTER 5

ROLE OF FOREIGN EXCHANGE IN 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 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

5.1 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 sectors 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.

31

5.2 GLOBAL PRESENCE OF BANK OF BARODA

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 Indias 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 worlds major financial centers i.e. New York, London, Dubai,
Hong Kong, Brussels and Singapore.
32

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.

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

Correspondent Links
BOBs International Banking network is further augmented by correspondent links with more
than 500 leading Banks in every country around the world over.

33

 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.

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.

34

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.

35

5.3 Instruments of foreign exchange market

There are several types of financial instruments commonly used.

Spots
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
36

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.

Forex swap
Forex swap is an over the countershort term interest ratederivative 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.

37

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.

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 Statesaccounting
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

38

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.

39

CHAPTER 6

6.1 FOREIGN EXCHANGE OPERATION UNDERTAKEN

BY BANK OF BARODA

FOREX OPERATIONS

40

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

41

 VARIOUS FOREIGN EXCHANGE SERVICES UNDERTAKEN BY

BANK OF BAROD

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--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.

42

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.

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 exporters 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.
43

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)

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.

44

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.
b.
c.
d.
e.
f.
g.

Advising export letters of credit.

Negotiating documents /under letter of credit.
Extending pre shipment packing credit advances.
Post shipment loans, against export bills sent on collection basis.(PSDL)
Deferred payment exports
Purchasing /discounting of export bills(FBP/UFBP)
Handling export bills on collection basis (FBC).

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.
45

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 contracts
3. Advance against receivables from government of India
4. 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
2. Uniform rules for collection international chamber of commerce publication NO
522
3. Uniform rules for bank to bank reimbursements. ICC NO 525
4. 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.
2.
3.
4.
5.

Original letter of credit with amendments if any

Bills of exchange
Invoice and Packing list
Transport documents in full set(bill of lading,airway bill etc)
Original insurance policy in negotiable form, certificate of insurance
46

6. Certificate of origin
7. Consular invoice/ customs invoice
8. Other documents if any

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

47

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 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.

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.

48

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.
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
49

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.

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.

50

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.
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

51

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 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
52

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

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 (EXTERNAL COMMERCIAL BORROWING)

53

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.
B.
C.

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,
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
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.
54

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.
2.
3.
4.
5.
6.
7.

Power,
Telecommunication,
Railways,
Road including bridges,
Ports,
Industrial parks and
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 Governments disinvestment programme of PSU shares.

Utilization of ECB proceeds is not permitted for on-lending or investment in capital

market by corporates.

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

55

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.
56

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.

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 project9- 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.

57

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

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
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 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 banks 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

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.
59

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.
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;

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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;
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.

61

We can explain this with the help of an example:

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.

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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.

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.
BOBs 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.

63

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.

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

64

Forward Cover Bookings

Cross Currency Swaps

Interest Rate Swaps (IRS)

Forward Rate Arrangements (FRA's)

Forex Money Market Operations

6.2 BENEFITES OF FOREIGN EXCHANGE

The various benefits of foreign operations of Indian banks particularly of bank of
Baroda are as follows:
Exchange reserve increase/balance of payment

Increase in the overall profit of the Bank of Baroda :

GLOBAL BUSINESS
65

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
BUSINESS

2,08,536

1,53,574

54,962

35.79%

GROSS
NPA

2.47%

3.90%

NET NPA

0.60%

0.87%

NET
PROFIT

1026

827

199

24.12%

OVERSEAS BUSINESS
31-3-2007

31-3-2006
66

ABSOLUTE

% CHANGE

(RS)/cr

(RS)/cr

CHANGE
(RS)/cr

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

-----

-----

1. 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.

2. Through facilities like EEFC accounts exporters and importers can take the
benefit of fluctuations in the exchange rates and exchange rate risks.

3. 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.

4. ECBs from international market will be an additional source for the Indian
economy like development of infrastructure sector etc.
5. 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.
6. Long term presence in market skilled and experienced staff is a key for the
rapid growth of BOBs Forex operations.

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CHAPTER 7

CONCLUSION AND SUGGESTION

SUGGESTION
CONCLUSION
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 India.
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 Deposite is offered at Banks major overseas centres excluding
USA. The rate of interest on this deposit is better than rate currently offered in the
market.
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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.

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
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www.forexstreet.com
www.bankofbaroda.com

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