EXCHANGE BANKS

Exchange banks also known as foreign bank is a community bank

offering personal and business banking services including
mortgages, home loan and lines of credit and SBA loans.
The exchange banks finance the internal trade of the country. They
finance the movement of goods from one commercial center to
another. They advance loans to traders and discount their bills of
exchange.
 Working of exchange banks in India

Currently there are 36 Exchange banks operating in India. Among

the biggest foreign banks in India are: Citi Bank, ANZ Grind lays
bank, Standard Chartered Bank, Hong Kong Bank, American express
bank, bank of America, British Bank of Mideast, Bank of Tokyo.
For operating in India every, every foreign bank is required to
obtain a license from the RBI.
Every foreign bank operating in India is required to deposit with the
RBI at the end of each calendar year 20 percent of its profit earned
in India. Every foreign bank is further required to keep 12 percent
of the total if its time and demand liabilities with the RBI as CRR
which is interest free.
 Functions of exchange banks

1. Financing exports: the exchange banks facilitates the payment of goods exported. This is done
through Document against Acceptance (D.A.) Bill which the Indian exporter draws against the
importer.
2. Financing imports: the exchange bank also facilitate the financing of imports. When an Indian
importer imports goods, he receives through the exchange bank on the basis of the Document
Against Payment (D.P.) Bill drawn by the foreign exporter.
3. General banking functions: the exchange bank performs general banking functions such as
accepting deposits, advancing loans, agency services, credit remittance facility, locker facility, stock
invest facility, card facility, etc.
4. Encourage foreign investment: Exchange banks are an important medium for projecting the
company’s image abroad. They provide Indian cooperation access to foreign collaborators as well
as introduce foreign companies to Indian corporation.
5. Mobilizing funds from Non-Resident Indians: the exchange banks help in mobilizing deposits from
nonresident Indians abroad through their network of branches located in foreign countries.
6. Canalizing agent: the exchange bank plays the role of canalizing agent for foreign currency credits for
major projects.
7. Revival of sick industries: the exchange bank helps in the revival of Indian sick industries by putting
their Indian clients in touch with NRIs who might be willing to invest in equity of firms in question, and also
facilitate the transfer of technology.
 Defects in the working of exchange banks

• Vast funds in Non-costing deposits:

• Large N0n-fund business
• Ignore term advances
• Ignore priority sectors
• Operate fund management schemes
• Unhealthy competition with Indian banks
Suggestions for Improvement of Exchange Banks:

A number of suggestions have been made to improve the working of

exchange banks in India so that they may be more helpful to the economy.
Some of the suggestions are:-
1. No Preferential Treatment:
The exchange banks operating in India should be treated at par with Indian
commercial banks.
2. Restriction on Branch Expansion:
RBI should not allow exchange banks to open more branches in the country
so that their activities are confined to port cities and big commercial
centres. RBI has done well in asking the exchange banks to bring in an initial
capital of Rs.15 crore in foreign exchange to open a branch.
3. Restriction on Non-Costing Deposits:
The exchange banks encourage the opening of current accounts by multinational
corporations and big industrial houses because they bring them more profits without
paying interest. They do not welcome small depositors. RBI should direct them to accept
small saving deposits and place a limit on non-costing deposits.

4. Restriction on Funds Management’ Schemes:

The exchange banks are earning huge profits by accepting money under the funds
management schemes which are not considered deposits. RBI should place restrictions
on such schemes by asking these banks to maintain the prescribed Cash Reserve Ratio
and the Statutory Liquidity Ratio on these funds as applicable to Indian banks.

5. Regulation of Lending Activities:

The exchange banks are allowed to undertake lending advancing and investment
activities without much restriction. RBI should regulate such activities. They should be
directed to give more advances for long term and invest in Indian companies rather in
multinationals operating in India.
6. Participate in Social Banking:
The exchange banks participate less in social banking. RBI should direct them to lend
more to small scale industry sector, retail trade, self-employed persons, etc.

7. Limit on Repatriation of Profits:

As exchange banks in Indian earn huge profits, they also repatriate huge sums to their
head offices abroad, even after keeping 20 per cent of their annual profits with RBI.
Recently, RBI has asked these banks to keep another 20 per cent of their profits in the
Indian books. This is not enough. They should be asked to keep at least 50 per cent of
their profits in India.

8. Removal of Discrimination against Indian Importers:

The exchange banks should remove discrimination against Indian importers by offering
them D.A. Bills, as is the practice in advanced countries.
9. Indians in Management:
All exchange banks operating in India should be directed to have at
least one Indian on the Management working in India.

10. No Mergers:
The exchange banks operating in India should not be allowed to
merge their branches without the permission of the Reserve Bank.

11. No Control over Indian Banks:

The exchange banks should not be allowed to have any type of
direct or indirect control over Indian banks. They should not be
permitted to acquire the shares of Indian banks.
12. No Association:
The exchange banks operating in India should not be allowed to form
any association without the permission of RBI.
 RBI Policy

RBI policy towards presence of foreign banks in India is based upon two
cardinal principles.
• Reciprocity
• Single mode of presence
 Some other policy guidelines of RBI towards foreign banks are as follows:

Foreign Banks have to adhere to mandated Capital Adequacy

requirements as per Basel Standard.
Foreign Banks should have to meet minimum capital requirement of Rs.
5 billion.
Foreign Banks should need to maintain minimum CRAR at 10% Priority
sector targets for foreign banks in India is 40%.
• Foreign banks have to follow other norms as set by Reserve Bank of
India.
 Foreign Banks/Exchange Banks

As of November 2018, there are 45 foreign banks with 286 branches and
40 banks from 22 countries operating as representative offices. Although
the discussion around differential licensing is still just coming into
existence and beginning to display signs of future potential.
• There is one foreign bank present as a credit card issuer with limited
banking licence. In addition, a number of foreign banks have also
entered India via the NBFC route, while a considerable number have set
up captive centres in the country. Foreign banks have less than 1% of
the total branch network but about 7% of the total banking sector
assets and a sizeable 11% of profits. With 334 branches in all, the share
of foreign bank branches is less than 1%.
 Market share
• Foreign Banks account for less than 1% of the total branch network in
the country. However, they account for approximately 7% of the total
banking sector assets and around 11% of the profits. Most of the
foreign banks in India are niche players and their business is usually
focused on trade finance, external commercial borrowings, wholesale
lending, investment banking and treasury services. Some other banks
are confined to private banking and wealth management.