Exchange position and Fund Position

Nostro- Vostro Accounts

Arrangement in which two correspondent banks (in different countries) keep a local currency account for one another. The system of nostro and vostro accounts facilitates foreign exchange dealings and settlements and allows the settlement of currency transactions between the Country's (Local)Bank and foreign banks.

 A nostro is our account of our money, held by you A vostro is our account of your money, held by us

Nostro Account
Nostro accounts are usually in the currency of the foreign country. This allows for easy cash management because currency doesn't need to be converted. A nostro (means "ours" in Latin) account is an account maintained by a Local bank with a foreign bank that allows the Local bank to buy foreign currency.

Vostro Account
The account a correspondent bank, usually U.S. or UK, holds on behalf of a foreign bank. Also known as a loro account. A vostro (means "yours" in Latin) account is an account maintained by an overseas bank with a Local bank that allows the overseas bank to purchase Local currency

When X (Buyer) a trader in Base Country wants to purchase Rs.5000 worth of goods by paying cash. Mr.X deposits the cash in his local bank in the country's currency for the corresponding amount (Rs.5000) then a swift message is sent to the corresponding bank in the foreign country where the local bank holds a NOSTRO account requesting the bank to make the payment to Y (Seller) in his local currency i.e. INR. Thus facilitating the trade between X & Y. IF Y wanted to buy something from X then the foreign bank would complete the deal using their VOSTRO account in X's country.

NRI Accounts
There are two types of NRI( Non Resident Indian ) accounts, namely non-repatriable accounts and repatriation accounts. Repatriable Accounts : Legally Indian rupees can be transferred back to foreign currency, that is money can be converted to any foreign currency. Non-Repatriable Accounts : Money cannot be converted to any foreign currency.

Repatriable Accounts
NRE Account ( Non-resident External Account ) Savings, Current & Time Deposits FCNR Account ( Foreign Currency Non-resident Bank Deposits) NRIs can avoid Risk of Foreign Exchange fluctuations by keeping their overseas money in (FCNR) and you can convert back money to the foreign currency. The account should be opened by the non-resident account holder. FCNR enable NRIs to earn good returns on their foreign currency earnings.

NRE Account
A NRE (Non-resident External Accounts) account is a Rupee denominated account. Funds in NRE account is maintained in Indian rupees only. Any interest earned on this account are exempt from tax

NRO Account
A NRO (Non-Resident Ordinary) account is a rupee denominated account. Foreign currency which you wish to deposit is converted to Indian rupees at the time of money is deposited into the account. NRO account is for NRIs who are having income (like rent, dividend, pension) in India and to make local payments in Indian Rupees for their genuine needs in India.

Non-Repatriable Accounts
NRO Account ( Non-resident Ordinary Rupee Account ) Savings, Current and Time Deposits Money once transferred from NRE account to NRO account loses its repatriability and hence, cannot be transferred back to NRE account. NRO Accounts are used to deposit money both in India and in foreign countries. All the deposits are held in Rupees.

International Funds Transfer & Overseas Payments

TT Transfer
The sender completes and signs an Application to purchase foreign currency which incorporates a Cross Border Foreign Exchange Transaction reporting form. The sender hands the application form and commercial documents, such as a commercial invoice and transport document, to the bank.

 Based on the reason for the payment the exchange control authorities specify what documents the sender must give to the bank. The bank uses a spot foreign exchange rate (telegraphic selling rate) to convert the currency to foreign currency. Based on the information given, the bank captures the data into their computer system and sends the SWIFT message.

Advantages
Speed SWIFT messages are delivered to the receiving bank on the day of despatch. However, payment will be effected on value date only, which, in terms of international banking practice, is two business days from date of the transaction. Safety The SWIFT system has built-in security features which makes it a safe, reliable method of transferring funds electronically Convenience The simplicity of the operation coupled with the efficiency and security factors make tele transmissions a convenient way of remitting funds internationally.

MTs
The sender opens an online banking session and chooses the recipient, the amount to send, as well as a security question and answer. The funds are debited instantly, usually for a surcharge. An e-mail is then sent to the recipient, with instructions on how to retrieve the funds and answer the question, via a secure website.

Methods of IN Trade Settlements

ADVANCE PAYMENT 1) Meaning:- An amount paid before it is earned or incurred, for example, a prepayment by an importer to an exporter before goods are shipped, or a cash advance for travel expenses.

This method is the most desirable for the Exporter, the Importer has to rely on the integrity of the Exporter and his capacity to execute the order in time. The entire transaction is financed by the Importer in this method thereby making the transaction more costly for him; besides exposing the Importer to credit risks. On account of the above factors some countries have imposed Exchange Control restriction regarding imports.

 In India advance payment is allowed only in respect of import of books, periodicals, life saving payment apparatus, capital goods, machinery and a few other items. 4) Advance payment amount can be made for commercial purposes. If the following condition are followed by the contract party.

 a) Documents produced by the parties must be evidence showing the demand of the overseas supplier. b) Payment must be given to the overseas supplier. c) Endorsement in the import licence if any.

OPEN ACCOUNT SYTEM

It is just opposite to the Advance payment. 1) Meaning: When an Exporter agrees to sell the commodity on open account system to the Importer, he despatches the goods to the buyer directly followed by the transport documents and an invoice requesting payment. 2) The Exporter loses control over the goods completely and leaves everything on the integrity of the buyer.

 3) It is beneficiary to the Importer; the Exporter bears the entire financial and commercial risks. This system is normally resorted to when the goods command buyer's market. 4) The commercial risk is, to some extent minimised by taking a policy of ECGC. To take care of the interest of the Indian Exporters, there are Exchange Control restrictions imposed by RBI on open account export Sales.

CONSIGNMENT SALE
If you sell goods sold on consignment, you have agreed to sell the goods without first buying those goods from the owner. Typically, your agreement specifies one of the following: 1) you agree to sell the goods on behalf of the owner as an agent 2) you agree to purchase the goods for an agreed price when you find a buyer. There are no restrictions on what goods can be sold on consignment. Goods regularly sold on consignment include: motor vehicles, boats, wedding and formal dresses, cameras, farm machinery and artworks.

 For Example: Selling on consignment means giving your car to someone else, usually a motor dealer, to sell on your behalf. Generally you set the minimum price you will accept and the dealer will add a commission to it. While the ownership and possession passes to the buyer in the case of open account system, the ownership remains with the seller in the case of consignment sale. In the case of goods exported on consignment basis, freight and marine insurance must be arranged in India.

DOCUMENTARY COLLECTION
The Exporter prepares the proper financial and commercial document including the transport document and hands over to his Banker requesting in clear terms as to how the documents are to be delivered to the Importer at the other end. Four main parties to a documentary collection are The Principal i.e.. the Exporter, The Remitting Bank - The Exporter's Bank , The Collecting Bank - The Bank in the Importer's country and The Importer, the consignee.

Sight Draft When the Exporter wants the Bank to hand over the export documents to the Importer only against payment immediately, the Bill of Exchange is called a Sight Draft. Document against Payment In case the Exporter wishes to give some time (30 days, 60 days, 90 days etc.) to the Importer to arrange for the funds but at the same time would not like to part with the documents before payment of money, the appropriate bill of exchange is called a D/P (Document against Payment).

 Banks act as intermediaries to collect payment from the buyer in exchange for the transfer of documents that enable the holder to take possession of the goods. The procedure is easier than a documentary credit, and the bank charges are lower. The bank, however, does not act as surety of payment but rather only as collector of funds for documents. For the seller and buyer, a documentary collection falls between a documentary credit and open account in its desirability