Description
It describes the FOREX (Foreign Exchange market) is an International foreign exchange market, where money is sold and bought freely. In its present condition FOREX was launched in the 1970s, when free exchange rates were introduced and only the participants of the market determine. The price of one currency against the other proceeding from supply and demand.
LALA LAJPATRAI INSTITUTES OF MANAGEMENT
ACKNOWLEDGEMENT
I would like to express my gratitude to all those who made it possible for me to complete this project. I want to give special thanks to Mr.S.K.Somaniji, the (Branch DGM) and Mr. Suresh N. Patel the Senior Manager of FOREX Department at the Opera House Branch, Bank of India for giving me permission to commence this project in the first instance, to do the necessary research work and to use departmental data for research and encourage me to go ahead with my project.
I also want to thank Mr. Jhala (Branch Chief Manager) and all the officers Mr. Patankar, Ms Zareen Engineer, Mr. Bantwal, Mrs. Shalakha of FOREX Department and also, Mr. Abhyankar ( Incharge of CREDIT Department), Mr. Nair and Mr. Swapnil Patil of CREDIT Department Who supported me in my project work. I also want to specially thank Mr. Kulkarni, the Staff manager and Mr.Somaniji (Branch DGM) for arranging factory visit to Poddar Diamond for us and also helped us to learn the actual working of bank.
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INTRODUCTION OF BANK OF INDIA
Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from Mumbai. The Bank was under private ownership and control till July 1969 when it was nationalised along with 13 other banks. Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50 employees, the Bank has made a rapid growth over the years and blossomed into a mighty institution with a strong national presence and sizable international operations. In business volume, the Bank occupies a premier position among the nationalised banks. The Bank has 3101 branches in India spread over all states/ union territories including 141 specialized branches. These branches are controlled through 48 Zonal Offices. There are 29 branches/ offices (including three representative offices) abroad. The Bank came out with its maiden public issue in 1997 and follow on Qualified Institutions Placement in February 2008. Total number of shareholders as on 30/09/2009 is 2,15,790. While firmly adhering to a policy of prudence and caution, the Bank has been in the forefront of introducing various innovative services and systems. Business has been conducted with the successful blend of traditional values and ethics and the most modern infrastructure. The Bank has been the first among the nationalised banks to establish a fully computerized branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction of the Health Code System in 1982, for evaluating/ rating its credit portfolio. The Bank's association with the capital market goes back to 1921 when it entered into an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is an association that has blossomed into a joint venture with BSE, called the BOI Shareholding Ltd. to extend depository services to the stock broking community. Bank of India was the first Indian Bank to open a branch outside the country, at London, in 1946, and also the first to open a branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a network of 29 branches (including five representative offices) at key banking and financial centers viz. London, New york, Paris, Tokyo, Hong-Kong and Singapore. The international business accounts for around 17.82% of Bank's total business.
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Mission "To provide superior, proactive banking services to niche markets globally, while providing cost-effective, responsive services to others in our role as a development bank, and in so doing, meet the requirements of our stakeholders".
Vision "To become the bank of choice for corporate, medium businesses and up market retail customers and to provide cost effective developmental banking for small business, mass market and rural markets
Opera House Branch
This project was done in Bank of India, Opera House, Charni Road, Mumbai. The project was to learn the procedures and functioning of the various department of a bank. In this process, learning about the instruments required for import and export financing by the banks plays a vital role. The Forex Department of Opera House branch mainly consists of two departments import & export these departments are explained in detail in the latter part of this project report. The import department is further divided into two sections. Forward contracts and Guarantee bring the same. Pre-shipment and post shipment are the section of exports department. This department has forward contracts also. This branch mainly deals with Diamond Trading. International finance is helpful for those who wish to seek import-export businesses. This project high the various bank operations done for international finance. The basic functioning of the banks and the use of various instruments for such banks remain the same regardless of the banks name or origin. For India to be a major player in world trade, an all encompassing, and comprehensive view needs to be taken for the overall development of the country‘s foreign trade. While increase in the exports is of vital importance we have also to facilitate those imports which are required to stimulate our economy. Coherence and consistency among trade and other economic policies is important for maximizing the contribution of such policies to development. Thus, while incorporating the existing practice of enunciating an annual EXIM policy, it is necessary to go much beyond and take an integral approach to the development requirements of India foreign trade. Thus we head for foreign trade policy
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Introduction To The Subject
FOREX (Foreign Exchange market) is an International foreign exchange market, where money is sold and bought freely. In its present condition FOREX was launched in the 1970s, when free exchange rates were introduced and only the participants of the market determine. The price of one currency against the other proceeding from supply and demand FOREX is a more objective market, because if some of its participants would like to change price, for some manipulative purpose .they would have to operate with tens of billions dollars, that is why any influence by a single participant in the market is practically out of the question. The superior liquidity allows the traders to open and /or close positions within a few seconds. The time of keeping a position is arbitrary and has no limits: from several seconds to many years. It depends only on your trading strategies. Although the daily fluctuations of currencies are rather insignificant, you may use the credit lines, which are accessible even to currency speculators with small capitals ($ 1000-5000), where the profit may be impressive. In FOREX, it‘s not obligatory to buy some currency first in order to sell it later; it‘s possible to open positions for buying and selling any currency without actually having it. Usually internet-brokers establish the minimum deposit such as $2000, for working in the FOREX market, and grant a leverage of 1:100.That is, opening the position at $100000, a trader invests $1000 and receives $99000 as a credit. The major currencies traded in FOREX, are Euro (EUR), Japanese yen (JPY), British Pound (GBP) and Swiss Franc (CHF). All of them are traded against the US dollar (USD).
The main merits of the FOREX market are: ? ? ? ? A two- way quotation is the unique feature of Forex. The biggest number of participants and the largest volumes of transactions. The market works 24 hours a day, every working days. A trader can open a position for any period of time he wants.
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DIAMOND INDUSTRY
India‘s diamond industry handles 80 per cent of the global polished diamond market, and earned $8 billion last year. India‘s diamond adventure took off in the 1970s when a small group of intrepid merchants, mostly Jains from Palanpur on the Gujarat-Rajasthan border, began invading the Belgian city of Antwerp, where 90 percent of the world‘s uncut diamonds were traded each year. First, they worked at the bottom end of the spectrum, taking up the smaller uncut diamonds. Next, they ?outsourced‘ the finishing jobs to India (where incidentally, the diamond industry employs more people than the IT industry), while working their way up the value chain. Growth of the diamond market in India is the highest in the world for Diamond Trading Company, a De Beers Group company, according to Cherie Tandon Saldanha, the company's marketing director for India. In volume terms, India is now the third largest market - accounting for 7 per cent of the company's total business - after the US (50 per cent) and Japan (13 per cent). "DTC accounts for 50 per cent of the diamond sale - both rough and finished - in the country and, keeping in mind the growth potential, 37 of our 92 sight holders globally are based in India." There are many well known brands like Asmi collection, Nakshatra brand, Asmi, Sangini, Arisia in India. Traditionally, India exports 11 of every 12 rough diamonds imported after finishing. The sector witnessed growth of 20 per cent in 2003 and 24 per cent in 2004. The diamond jewellery market in the country was valued at Rs 6,600 Crore (Rs 66 billion) in 2004, with diamonds constituting 70 per cent of the total value the highest globally.
Diamond Trading Corporation (DTC):
The Diamond Trading Company (DTC) is the rough diamond sales and distribution arm of the De Beers Family of Companies and is the world's largest supplier of rough diamonds. With activities in sales, sorting, valuing and diamond beneficiation, the DTC has representative offices in the UK and South Africa. The joint ventures DTC Botswana and Namibia DTC – 50:50 partnerships with the governments of Botswana and Namibia – sell diamonds to clients for cutting and polishing in those countries. Joint Ventures DTC Botswana and Namibia DTC – 50:50 partnerships with the governments of Botswana and Namibia – sell diamonds to clients for cutting and polishing in those countries.
Sorting and Valuation: The DTC‘s main sorting activities are broken down into production sorting and aggregation. No two diamonds are the same and production sorting is the classification of the various sizes, shapes, colours and clarities of rough diamond into one of around 12,000 categories used by the DTC. The sorting process ensures the correct valuation of all production. It also ensures that a consistent supply of diamonds can be delivered to the DTC‘s clients, who are among the world‘s leading diamantaires. Selling and Distribution: The Diamond Trading Company‘s (DTC) sales strategy is known as ?Supplier of Choice‘. It sought to build a more efficient channel for rough diamond distribution by the DTC and maintain ethical transparency amongst the DTC‘s client base
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?
The DTC goes beyond simply distributing rough; rather it aims to understand, in depth, the needs of our Sight holders clients, it enables Sight holders to gain maximum clarity and confidence about their supply delivery thereby helping to reduce the risk and volatility for their own businesses. The development of local marketing activity. The creation of thousands of jobs in the diamond industries of these nations, achieved through the establishment of producing country DTC operations in Botswana (DTCB), Namibia (NDTC) and South Africa (DTC SA)
?
Sights DTC customers physically inspect their allocations of rough diamonds before deciding whether or not to purchase them. Customers literally have ?Sight‘ of the diamonds, and this is why these selling periods are called ?Sights‘. The DTC does not sell rough diamonds other than at the Sights. Sight holders are carefully chosen by the DTC through the Supplier of Choice sales strategy for their ability to add value to the diamonds we sell, their expertise in particular rough diamonds and their financial and ethical integrity.
INDUSTRY VISIT PODDAR DIAMONDS Pvt LTD
Poddar Diamonds was established in 1988 by Anil Poddar, Umesh Poddar and Kantilal Poddar; where Mr. Anil Poddar handles purchase, marketing/sales and Mr. Umesh Poddar and Kantilal Poddar handle manufacturing activity. The main business of Poddar diamonds is Importing rough Diamonds, processing them and exporting the polished diamonds. It procures rough diamonds from RIO TINTO, Belgium and after processing these rough diamonds exports back to UAE, BELGIUM, HONG KONG, JAPAN, ITALY and SINGAPORE.
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Poddar Diamonds has factory in Dahisar, Mumbai and Ahmedabad in India.Intially it was partnership business but turned into a ltd. Company in the year 2006 after Monica and ShardaDevi entered into the business. Poddar Diamonds is well known for its brand SPARKLES in the market which is marketed at supermall in Tier I& Tier II cities (eg: Shoppers Stop)
Poddar Diamonds has a diamond factory in Dahisar, Nihar Jewels which was established in the year 1994 by Mr. Nihar Joshi in Salasar Estate, Dahisar. In the year 1994 Mr. Nihar Joshi had started this factory with 3 people i.e. designer, caster and setter with an investment of Rs.5 lakhs in the factory: Currently this factory posses an employee strength of about 165 in this unit. This factory in particulars is divided into 3 main departments Diamond Cutting, Diamond Polishing and Jewellery designing.
Jewellery Designing
Currently these unit posses 80 employees which work for about 12 hours per day. 90% of the worker are Bengali as Bengalis posses the art of Karigars. The process in this department goes as follows:
Designing on Paper
Approval by Client
Designing the Master
Molding and Cutting
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Casting
Actual Production
Quality Control
Designing on Paper:
The process starts with designing on paper manually by a group of designers, the ideas are generated through Brain Storming and by attending Fairs and Exhibitions, seminars.
Approval by Client:
These designs are further approved by Mr. Poddar or by client if the jeweler is a customized one.
Designing of Master:
After the approval by client a master piece of the same is designed in silver which is further duplicated by preparing the same in rubber. The designs are made in silver as the master is an asset for the company which has to be preserved and for further order the blueprint of the master or ris sent for gaining orders from the market, the master is in silver as silver is a cheaper than gold.
Molding and Cutting:
The master which is prepared in silver is further prepared on rubber dye which is further being used for preparing design in wax. The design which is prepared on rubber dye is done through machine called vulcanizer which helps in getting the imprint of the design on the dye. The rubber which is used is imported and costs about Rs750-800 /Kg as it lasts for about 8-10 years. The design which is made on wax is further used in casting process
Casting:
The design which is made on wax is further being placed in a mould machine which contains POP to get the design casted on POP , for this process the mould is further heated in an Oven at 800 ° C. After preparing design on POP the design is further used in Actual production
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Actual production:
In actual production the POP which is designed is further designed into Gold (10, 14, 18 Carats as per requirement of customer) which is being put into an automatic machine for melting and getting a shape of a tree which gives an outcome of about 12-15 rings which are further separated and filing is carried out.
Filing, setting and polishing:
Filing is done by workers through machine and other tool for removing the dirt and giving a finish touch to the jeweler and in the jewelry the diamond is set, for setting diamonds machines are used and if the diamonds are smaller in size i.e. in millimeter the diamonds are set using the microscopic technology. In a day, a normal machine can set about 100 diamonds appx., and a microscopic machine can set appx. 50-60 diamonds. After setting the diamond the polishing of the jewelry is carried out using brush of different sizes which helps in removing the dust particles and fingerprints.
Quality control:
Quality check is carried out as Poddar diamonds deals in branded range of products and if the jewelry is rejected then it is further recycled and being used again for making new design.
Diamond Cutting and Polishing Process
Diamond cutting is further divided into 2 units diamond cutting and diamond polishing. Diamond cutting is done by laser as per its properties it is hard in nature. In this process a rough diamond which is imported from RIO TINTO, Belgium is cut into pieces as per order and diamond size. The process goes as further.
Planning
Sairn Marking
Table smoothing
Bruting
Girdling
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Planning:
The company first imports rough diamonds from Belgium The planner must consider the size, clarity and crystal direction when deciding where to mark the diamond rough and then this rough diamond is further sent for Sairn marking process
Sairn Marking:
In this process the rough Diamond is cut into pieces with the help of laser, in this the maximum portion is taken to get more output.
Bruting:
In this process the diamond which is obtained out of rough is placed in between the rods and is rotated at a high speed to get a round outline so that it gets into shape.
Table Smoothing:
Table is the uppermost portion in the diamond and the diamond is placed in the holder and rubbed against the disk for creating a flat and smooth surface.
Bottom Block:
The lower part of the rough is brought into shape to create facets and girdling by setting the holder at various degrees to get a proper shape of the tip and the pavilion so that it gets a conical shape and can be set in the jewelry.
Regirdling:
Regirdling is done to get the cuts in the crown i.e. between the table and the girdle to get the cuts i.e. star shape facets and cuts at the crown.
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FAQs
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A) Why was the factory located at Dahisar? Answer: Mr. Nihar Joshi had brought this factory in 2000, Dahisar was not yet developed and the rates of property was very cheap and it was nearby Dahisar station so its easier for the worker class to travel. B) What was the main cost in his business?
Answer: The main cost in his business was the cost of Karigar and machines as he was totally dependent on them for further production. He was of the opinion that his employees are his Assets. Other cost like electricity cost, maintenance cost , license cost and taxes are secondary cost in every business, main cost is of employees as there were 165 employees currently working in his factory. C) What were the working hours in his factory? Answer: In his factory there were 3 units , Diamond cutting (35 Employees) which worked for 24 hours in 2 shifts of 12 hours each , Diamond Polishing (50 Employees) and Jewelry Department (80 employees) which worked for a shift of 12 hours. D) In machines, which would you prefer imported or Indian?
Answer: Mr. Nihar said that his unit had imported the casting machine worth Rs.12 lakhs from Japan as it is well known for its technology but if you are an SME then machines of Indian origin are equally well equipped with technology in comparison to imported one but machine of Indian origin is much cheaper than the imported ones and it may cost around 2-3 lakhs. E) Where do we get the machines of Indian Origin of good quality?
Answer: Bombay, Rajkot, Surat F) What is the profitability of your unit? Answer: Profitability in jewelry is 60-70%. Profitability in diamond is 15-20%
G) What is the process loss? Answer: The process loss in gold is 6% and there is no process loss in diamond .As the residue is been used in millimeter in jewelry which are exported and dust particle are used in table and bottom Smoothing and if there is any break down in machine and if the machine remains shut for 2-3 hours in a day then the factory incurs a heavy loss which runs into lakhs. H) What sanitation measures are been taken in the factory? Answer: Proper Drinking and health care measures are taken in the factory. the factory carpet is wiped in every 15 minutes with the vacuum cleaner as if the floor not cleaned then the unit may face loss as the dust particles found on the factory floor are mainly the gold particles which can be recycled and reused for making jewelry.
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I) What is the production of your company? Answer: The production of my company is 600 diamonds appx. per day and monthly its around 5000 pieces. J) If an individual wishes to start with a diamond business what would be the initial investment? Answer: Initial Investment would be around Rs.5 lakhs out of which 2-3 lakhs can be used in buying machines and the most important are the Karigar in this business. K) Which according to you is the most suitable location to set up a Diamond unit Mumbai or Gujarat? Answer: According to him Gujarat is the most suitable location as Gujarat government provides N number of facilities in Entrepreneurship development by providing huge subsidies in setting up a unit i.e. Electricity, licensing, water, export duties and tax benefits with cheapest labour cost: Comparatively Mumbai is more expensive as labour cost is more due to forming of Unions and setting up cost is also high and no subsidies are granted by the Maharashtra government.
WORKING CAPITAL
Working Capital are generally funds deployed for managing business operations which the diamond traders generally require for payment to labour, rent and Electricity. In Diamond Industry Labour or Karigars are of vital importance for any diamond merchant due to their skills and expertise which is required on work. Working Capital refers to that part of the firm‘s capital, which is required for financing short-term or current assets such as cash, marketable securities, debtors and inventories therefore funds thus invested in current assets keep revolving fast i.e. when traders first buy/import Raw Diamond from Diamond Trading Corporation and then process it and export it.
Factors Determining Working Capital: ? Total Costs incurred on materials, wages and overheads. Material is generally lenses, wax; chemicals POP which is required by the Diamond Traders in processing the rough Diamond into finished one. Wages for Karigars which are specialized skilled labours for this industry and Overheads are expenses which generally form the main part of operations ? The length of time for which raw materials remain in stores before they are issued to production, in case of Diamond Industry it is mainly 3 months. ? The length of the Production Cycle or Work-in-progress, i.e., the time taken for conversion of raw materials to finished goods, in this Industry it requires around 3-6 months as per orders ? The length of the Sales Cycle during which finished goods are to be kept waiting for sales.
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?
? ? ?
Finished Goods level = (Finished Goods as on 31st March * 12 months) / Total Cost of sales Total Cost of Sales means all manufacturing expenses + Opening stock of finished goods – Closing Stock of Finished Goods. Manufacturing Expenses include Raw materials consumed, Labour Charges and other direct expenses. The average period of credit allowed to customers/ debtors is 3 months but in this Industry we have viewed that the customers which purchased Diamond of smaller size (in MM) which are generally sold to overseas customer are on Credit basis as the risk involved is less whereas when a big size diamond or a Solitaire is sold its on Cash basis as the risk involved is more. The amount of cash required to pay day-to-day expenses of the business i.e. especially to worker who are on temporary basis which are generally less in this industry. The amount of cash required for advance payments, if any The average period of credit to be allowed by suppliers Sundry Creditors level = (Sundry Creditors as on 31st March*12 months) / Total purchases of Raw Materials and Finished Goods
Financing of working capital had always been an exclusive domain of commercial banks. With the nationalisation of the banks an entirely new breed of entrepreneurs made a demand on bank credit. Small sector and other segments of priority sector were to be the major beneficiary of nationalisation and were preferred claimants of credit. This resulted in an unexpected demand on lendable funds of banks and naturally called for a reform in the policies of banks to orient them to the new developmental role assigned to the banking industry. Another important factor which called for reforms was the inbuilt weakness in the cash credit system linked with emphasis on security. The limits were directly fixed on the basis of security available in the account which in many cases resulted in double finance. In view of such a situation obtaining at that time, Reserve Bank of India constituted a 'Study Group' with Shri Prakash Tandon as Chairman in July, 1974 to frame necessary guidelines on bank credit
Working capital Requirement is assessed in two ways
1. Tandon Committee Report 2. Turnover Method
Tandon Committee Method: This method is used when the working capital limit is more than 5 Crore and exceptionally applied for below 5 Crores depending on higher credit need from borrower. 'Tandon Group' suggested norms for 15 different kind of industries covering a major part of all industries in the country and the norms related to ? ? ? ? Raw materials Stocks in process/semi finished goods Finished goods Receivables
Which together make for bulk of the current assets of any unit. As per Reserve Bank of India, the banks have been given discretion to decide the levels of holding of individual items of inventory and of receivables, which should be supported by bank finance after taking into account the
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production/processing cycle of an industry as also other relevant factors. Reserve Bank will not prescribe detailed norms for each item of inventory as also of receivables; but only advise the overall levels of inventory and receivables for different industries for the guidance of the banks to serve as broad indicators. The other factors will include the financial parameters of the borrower. However the relaxatation is permitted by the banks depending on past track record of the company. The trade creditors‘ level is accepted by banks generally depending on the normal practice in industry/past record of the company. Thereafter the working capital is assessed by the banks by the following computation.
A) Total Current Assets a. Total Current asset Excluding Exports receivables B) Other Current Liabilities C) Working Capital Gap (A-B) D) Minimum Stipulated net working Capital (25% of A) E) Actual/projected net working capital F) C-D G) C-E H) Maximum permissible bank finance (MPBF) (lower of F & G) I) Excess borrowing if any. (when current ratio is less than 1.33) For doing above exercise bank will need audit stock, provisional balance sheet and Profit & loss A/c for last year and CMA showing estimated and projections for Current financial and next financial year. CMA is verified by banks and if estimates are not acceptable banks may revise it keeping in view the acceptable levels of inventory, receivables and trade creditors. Bank analyses the CMA, audited balance sheet and profit & loss A/c for last year and completes the assessment as per tandon‘s method (2) as above.
T
he Industry margi n of 25% under both the Diamond Exporter metho 1. DTC Sight 3.50 1.00 3.00 7.50 ds is Holders the 1. Non-DTC Sight 3.00 1.00 3.00 7.00 mini Holders mum requirement to ensure a minimum of current ratio of 1.33. If a borrower has more liquid surplus, the MPBF will be reduced accordingly. To illustrate this point let us consider the following example Total current assets Total current liabilities excluding bank borrowings Net working capital 1000 200 800
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Raw Materials including stores and other items used in the process of manufacture) (Months’ consumption)
Finished Receivables Overall Goods (Month’s levels (Months’ Sales) (Months) Cost of Sales)
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MPBF under method II will be calculated as under: Particulars Total current assets Total current liabilities excluding bank borrowings Working capital gap Minimum margin of 25% of total current assets Actual net working capital iii - iv iii- v MPBF (Minimum of vi or vii) Excess bank borrowing Amount 1000 200 800 250 300 550 500 500 0
The Tandon committee further suggested that banks should endeavour to grant credit facilities to the purchasers as far as possible and seller should be paid immediately after sale. This type of financing can also be arranged through the medium of bills and is popularly known as 'Drawee Bill Scheme‘. The seller will be paid immediately on presentation of the bill and the liability against these bills will be on account of the buyer as part of his working capital limits. On due date the bills will be paid to the bank by the buyer Estimates for the ensuing quarter: It gives the level of current assets and current liabilities as are estimated for the ensuing quarter on the basis of which operating limits will be fixed by the banks. Performance during the previous quarter: This statement is to be submitted within 6 weeks from the close of the quarter to which the statement relates. By making comparisons between the above statements the quality of credit planning by the borrower and his efficiency to translate his plans into actual production can be effectively ascertained. 'Peak Level' and 'Normal Nonpeak Level' Limits Separate appraisal and fixation of credit limits for 'peak level' and normal 'non-peak level' must be necessary and the periods during which the separate limits will be in operation must also be specified. Adhoc or Temporary Limits Bank have now been given full discretion to sanction ad hoc facilities based on commercial judgement and merits of individual case. The rate of interest and others terms and conditions including period of ad hoc/temporary limits will be as per the discretion of concerned bank.
Diversion of working capital finance The funds lent by the banks against working capital limits are required to be utilised for meeting genuine working capital needs of the borrowers and cannot be allowed to he diverted for other purpose such as investment in finance companies, associate companies/subsidiaries, inter co- operate deposits etc.
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CMA data is a tool used by the bankers to assess the requirement of working capital. It is divided into six parts as follows: Form I: Particulars of existing |& Proposed limits. Form II: Operating Statement Form III: Analysis of Balance sheet Form IV: Comparative statement of Current Assets and Current Liabilities Form V: Computation of Maximum Permissible Bank Finance (MPBF) Form VI: Funds Flow Statement
Turnover Method: This method is used when the working capital limit is less than 5 Crore. Under this method 20% of estimated sales is provided as the working capital by the banks. In actual when the NWC with the borrower is less than the minimum required then limit in that case may be released in phases depending upon accumulation of profit during the current year so that necessary margin is available with the borrower. This method is generally referred to as 'Turnover Method'. If the borrower needs higher limits than assessed as per turnover method, the bank will be required to assess the working capital requirements by conventional method. The higher of the two limits (which is also known as maximum permissible bank finance, which excludes deemed exports) may be allowed to the borrower and actual disbursement will be regulated through availability of drawing power in the account. For SSIs the limit has been increased from 2 Crores to 5 Crores.
LC Rating (Large Corporate Rating): While granting finance to any of the companies, banks take into account the LC ratings of the companies which are also given by some other institutions (like CRISIL, ICRA, CARE) if the industry/sector differs, these institutions take into the account the growth of the sector and the financials of the company (of last 3 years for reference)and the project copy for which they need finance currently. By judging the financial parameters and the know-how of the industry, finance is granted to the companies according to their limits and LC ratings of their company. These LCs are crated on the basis of latest audited balance sheet of the company.
LC LC1, LC2 LC3, LC4 LC5, LC6 Below LC6
Rating AAA AA A B
Remark Excellent Good Satisfactory Worse
If the rating is LC1-LC4 then it generally suggest that the credibility of that company is really very good but when a company receives LC5 then banks may think of possessing more of collateral due incurring of higher risk while financing, when the LC rating is below LC6 banks do not finance . Amount to be granted for loan is on the basis of sales. Generally banks finance up to 50% of sales .If a company‘s LC rating is LC6 then banks may enter into consortium.
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The banks may enter into consortium when the rating is satisfactory or the amount to be financed is too high. For the purpose of consortium, RBI allows minimum 2 banks and maximum 15 banks to enter into consortium in order to bear the risk on the pro-rata basis. In a consortium, the bank which provides the highest share is the LEAD bank and rest of them are the member banks .The Lead bank in the consortium has decisions making right and the member banks have to stay abide by the decisions of lead bank. In case of default all the proceedings like filing a suit against the exporter and follow-up and documentation is to be carried out by the lead bank. All the member in a consortium meet every Quarterly in order to discuss the major issues and problems faced by them in financing. In case of default, the collateral which is auctioned is shared on the basis of their share in the consortium. The finance which is provided is of two types fund based and non fund based. In fund based limit the finance provided is generally in INR and in Non-Fund basis the finance provided is in the form of Letter of credit and Bank Guarantees. In many cases advance against Equity share capital is also provided if a company proposes to issue Equity Share capital.
Working Capital Requirement
Fund Based
Non- Fund Based
Pre-Shipment Finance
PostShipment Finance
Letter of Credit
Bank Guarantees
Fixation of Limit: The limits are fixed by the bank within the overall sanctioned limits on the basis of audited balance sheet and provisional balance sheet of the current year submitted by the exporter. This statement will form the basis of quarterly review of the account and fixing of operative limits. The projection which are provided by the bank are on the basis of past trends and in order to check the reliability of the account the clients are requested to submit the stock statement to the bank every month. Any excess/under utilisation of operative limit beyond the level is taken as an irregularity revealing defective planning by the exporter and some corrective measures are taken by the banks in order to avoid recurrence of such irregularities in future. Bank has made it compulsory for all exporters enjoying working capital credit limits of Rs.100 lacs and above to submit the quarterly operating statements before the commencement of the quarter. If a borrower does not submit these statements within the prescribed time limits, the bank charges to the client penalty interest of one per cent per annum on the total outstanding for the period of default in submission of statements.
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The penalty is followed by a notice to the client/exporter to freeze the account if the default persists. Even in consortium accounts, the operations in cash credit accounts of the exporter may be frozen. If the quarterly operative returns are not submitted. No additional limits will be sanctioned to such defaulting borrowers. Export Finance: The main core business of the Branch in Opera House is to Finance Diamond Exporter. These exporters require finance for Import of Rough Diamonds which is generally available in UAE, BELGIUM, HONG KONG, JAPAN, ITALY and SINGAPORE. After acquiring the rough from the mines they are processed and then they are exported to USA, Hongkong etc.
The export finance which is granted by bank is of two types: 1) Pre-shipment finance/Packing Credit. 2) Post-shipment finance.
Pre Shipment Finance/ Export Packing Credit (EPC):
Pre-shipment is also referred as ?packing credit?. It is working capital finance provided by commercial banks to the exporter prior to shipment of goods. The finance required to meet various expenses before shipment of goods i.e. procurement of raw material, payment to labour/Karigars, processing of rough diamond into finished diamond. This finance is generally given for a time lag of 180-270 days. The finance which is provided against the export order. The bank finances upto 90% in INR and if required in foreign currency 100% of loan is granted. . Importance of Pre-Shipment Finance: ? To purchase raw material like Rough Diamond which is generally imported or purchased from the Diamond Trading Corporation or Gold for fixing the diamond into gold studded jewelry which is also imported from mines and brought from canalized agencies like Mineral and Metal Trading Corporation or from State Trading Corporation . Many of the Exporter buy in bulk from the bank which have authorized agency as per RBI guidelines, banks like Bank of India, HDFC, ICICI and Union Bank of India have the authority to sell gold to the diamond traders. ? ? To assemble the goods in the case of merchant exporters/ members of DTC which are also known as sight holders. They assemble goods like Rough Diamonds, Gold, Machines, Microscope, Vulcanizer and other Chemicals, brush required for polishing etc. To store the finished goods as these goods are in anticipation in demand as these are luxurious goods and they are to be stored till they are sent through Air Route.
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? ? ?
To pay for packing, marking and labeling of goods. To import or purchase from the domestic market heavy machinery and other Capital goods to produce export goods. Mainly the machineries required are laser machines which are required for diamond cutting and brutting. To pay for export documentation expenses i.e. for lodging of bill i.e. 0.16% , Minimum Charged is Rs.650 and maximum Rs.7500.
Forms of Pre-Shipment Finance: A) Export Packing Credit: 1. Cash Packing Credit Loan: In this type of credit, the bank normally grants packing credit advantage initially on unsecured basis. Subsequently, the bank may ask for security. 2. Advance against Hypothecation: Packing credit is given to process the goods for export. The advance is given against security and the security remains in the possession of the exporter. The exporter is required to execute the hypothecation deed in favour of the bank. In hypothecation, the diamond traders generally give office premises and raw material as collateral security 3. Advance Against Pledge : The bank provides packing credit against security. The security remains in the possession of the bank. On collection of export proceeds, the bank makes necessary entries in the packing credit account of the exporter. In pledge, diamond trader generally keeps Bharat Diamond Bourse (BDB) as collateral security. Bharat Diamond Bourse (BDB): Bharat Diamond Bourse is a bourse especially meant for Diamond traders in order to shift their business from Panchratna to BDB which is in Bandra Kurla Complex. Most of the Diamond merchant traders have shifted there as these traders have formed a union to form a International HUB for Jewelry and Diamond Industry in India. Most of the banks and other allied activities which are required to run a business will be available under one roof Disbursement of Packing Credit: After proper sanctioning of credit limits which is done in credit Department, the bank ensures that a) To complete proper documentation and compliance of the terms of sanction i.e. Creation of mortgage etc. b) There should be an Export Order / Bill of Exchange / Copy of Invoice produced by the exporter on the basis of which disbursements are normally allowed.
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In both the cases following particulars are to be verified: i. Name of the Buyer. ii. Commodity to be exported. iii. Quantity. iv. Value. v. Date of Shipment / Negotiation. vi. Authorization by the customs. vii. Any other terms to be complied with.
B) Packing Credit Foreign Currency (PCFC): ? ? ? ? The PCFC is granted to the exporter by the commercial banks in foreign Currency in order to make the payment for import of Rough Diamond. It is an additional window to rupee packing credit scheme & available to cover both the domestic i.e. indigenous & imported inputs. The exporter has two options to avail him of export finance. To avail him of pre-shipment credit in rupees & then the post shipment credit either in rupees or in foreign currency denominated credit or discounting/ rediscounting of export bills. PCFC can also be given for ?deemed exports? for purchase of supplies. This finance should be liquidated within a maximum period of 30 days.
Eligibility: PCFC is extended only on the basis of confirmed /firms export orders. However, the facility of the liquidation of packing credit under the first in first out method will be allowed. Order: Banks insist on submission of export order for every disbursement of pre-shipment credit from exporters. Generally as soon as the Export Payment is realized the EPC/PCFC is liquidated first and then the balance is credited to the Current Account.
Post Shipment Finance: Post Shipment Finance is a kind of loan provided by a financial institution to an exporter after export has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds Basic Features The features of post shipment finance are:
?
?
Purpose of Finance: Post shipment finance is meant to finance export sales receivable after the date of shipment of goods to the date of realization of exports proceeds. In cases of deemed exports, it is extended to finance receivable against supplies made to designated agencies and as the payment is made it is considered as Outward Remittance (ORTT). Basis of Finance Post shipment finances is provided against Export Bill of goods or supplies made to the importer or any other designated agency. Post shipment finance can be secured or unsecured. Since the finance is extended against evidence of export shipment and bank obtains the documents of title of goods, the finance is normally self
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liquidating. Further, the finance is mostly a funded advance. In few cases, such as financing of project exports, the issue of guarantee (retention money guarantees) is involved and the financing is not funded in nature. This kind of Guarantee is also known as bank guarantee or Bank Certificate and the main objective for issue of this certificate was that the export has taken place which helps in renewing or avoiding cancellation of Export license.
Quantum of Finance: As a quantum of finance, post shipment finance can be extended up to 100% of the invoice value of goods. In special cases, where the domestic value of the goods increases the value of the exporter order, finance for a price difference can also be extended and the price difference is covered by the government. This type of finance is not extended in case of pre-shipment stage. Banks can also finance undrawn balance. In such cases banks are free to stipulate margin requirements as per their usual lending norm. Period of Finance Post shipment finance can be off short terms or long term, depending on the payment terms offered by the exporter to the overseas importer. In case of cash exports, the maximum period allowed for realization of exports proceeds is six months from the date of shipment. Concessive rate of interest is available for a highest period of 180 days, opening from the date of surrender of documents. Usually, the documents need to be submitted within 21days from the date of shipment.
Types of Post Shipment Finance: The post shipment finance can be classified as: 1. Export Bills purchased/discounted/ negotiated. 2. Advance against export bills sent on collection basis. 3. Advance against export on consignment basis
1. Export Bills Purchased/ Discounted. (DP & DA Bills): An export bill is used in terms of sale contract/ order may be discounted or purchased by the banks. It is used in indisputable international trade transactions and the proper limit has to be sanctioned to the exporter for purchase of export bill facility. It includes a grace period 25 days which is generally granted to the exporter in order to send all the copies of the bill to the importer. It also includes acceptance of draft in favour of the Drawee of the bill.
2. Advance against Export on Consignments Basis: Bank may choose to finance when the goods are exported on consignment basis at the risk of the exporter for sale and eventual payment of sale proceeds to him by the consignee. However, in this case bank instructs the overseas bank to deliver the document only against trust receipt
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/undertaking to deliver the sale proceeds by specified date, which should be within the prescribed date even if according to the practice in certain trades a bill for part of the estimated value is drawn in advance against the exports. 3. Cash on delivery basis or on the basis of sight: Banks also choose to finance on cash on delivery basis where in the bill period is only of 25 days. The payment is made only on submitting the export documents to the bank. It is generally included when it is a bank through payment.
Calculation of the bills:
Company XYZ. Shipment Date 15-12-2009 13-06-2009 Tenor of Bill days 180
Initiall y in order to Today 23-12-2009 Subvention Rate 7.25% boost the exports of the No. of Days from shipment Interest Rate 180 Days 9.25% 120 nation Day from today 172 Interest Rate >180 Days 15.25% Government had come up No of days up to 31-03-2010 99 Interest Amount 610630 with a policy Amount after interest 15389370 of Interest Rate Subvention which will act as an Incentive for the exporters. The interest which was charged initially was 9.25% within the time lag of 180 days and subvention was in validation upto 31 st March 2010. Above mentioned specimen of Company XYZ shows the effect of interest rate subvention i.e as shown in the bill that the tenor of the bill is 180 days from the date of shipment i.e. from 15th December to 13th June (6 months). As the interest subvention is upto 31st March so the number of days left are 99 days for which the subvention is valid and for the rest of the days 9.25% will be charged.
Notional Due Date Amount purchase 16000000
After the Notional Due date 15.25% is charged till the date of realization of the bill. 16000000*7.25*99 100*365 + 16000000*9.25*(172-99) 100* 365 = 314630+296000 = 610630.
So the Amount to be credited to the account is 16000000-610630 i.e. Rs.153839370.
Company PQR Shipment Date Notional Due Date Today No of Days from shipment From today Concession Rate upto 03-06-2010 28-06-2010 07-06-10 25 21 180 Tenor of Bill days Amount Purchase Interest Rate 180 days Interest Rate >180 days Interest amount Amount after interest 25 3520000 9.25% 15.25% 18733 3501267
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The Notional Due Date of the bill is the tenor of the bill plus the date of shipment. The date of Shipment is 3rd June 2010. The tenor of the bill given is 25 days as it is Cash on Delivery and as the shipment date is after 31st march 2010 so Interest Rate subvention is not applicable. So Calculation is 3520000*9.25*25 = Rs.22301 365*100 So the amount to be credited in the client‘s account is Rs.3520000 – Rs. 22301 i.e. Rs.3501267.
Documentation Required for Export Finance.
Introduction
International market involves various types of trade documents that need to be produced while making transactions. Each trade document is different from the other and presents the various aspects of the trade like description, quality, number, transportation medium, indemnity, inspection and so on. So, it becomes important for the importers and exporters to make sure that their documents support the guidelines as per international trade transactions. A small mistake could prove costly for any of the parties. For example, a trade document about the bill of lading is a proof that goods have been shipped on board, while Inspection Certificate certifies that the goods have been inspected and meet quality standards. So, depending on these necessary documents, an exporter can assure an importer that he has fulfilled his responsibility whilst the importer is assured of his request being carried out by the exporter. The following is a list of documents often used in international trade:
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? ? ? ? ? ? ?
Air Waybill Draft (or Bill of Exchange) Insurance Policy (or Certificate) GR form Bill of Entry Packing List/Specification Inspection Certificate
Air Waybills: Air Waybills is generally issued by the logistic company and it acts as a proof that the goods have been received for the purpose of export by air. It is nor a document of title of goods neither a negotiable document because it is merely an acknowledgement of goods. If an agent fails to pay the freight on the airway bill, the carriers will have the right over the goods and the holder of the bill will not get his goods. A typical air waybill sample consists of three originals and nine copies. The first original is for the carrier and is signed by an export agent; the second original, the consignee's copy, is signed by an export agent; the third original is signed by the carrier and is handed to the export agent as a receipt for the goods.
Air Waybills serves as: . • A certificate of insurance. • A guide to airline staff for the handling, dispatch and delivery of the consignment.
The air waybill contains details like:
? ? ? ? ? ?
The proper shipper and consignee must be mention. The airport of departure and destination must be mention. The goods description must be consistent with that shown on other documents. Any weight, measure or shipping marks must agree with those shown on other documents. It must be signed and dated by the actual carrier or by the named agent of a named carrier. It must mention whether freight has been paid or will be paid at the destination point.
Commercial Invoice: Commercial Invoice document is provided by the exporter to the importer. It is also known as export invoice or import invoice or a document of content as it contains all the information required for preparation of all other document, commercial invoice is finally used by the custom authorities of the importer's country to evaluate the good for the purpose of taxation. The invoice must
? ?
Be issued by the beneficiary named in the credit (the seller). Be address to the applicant of the credit (the buyer).
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? ? ? ? ? ?
Be signed by the beneficiary (if required). Include the description of the goods exactly as detailed in the credit. Be issued in the stated number of originals (which must be marked "Original) and copies. Include the price and unit prices if appropriate. State the price amount payable which must not exceed that stated in the credit Include the shipping terms.
Bill of Exchange: A Bill of Exchange is a special type of written document under which an exporter ask importer a certain amount of money in future and the importer also agrees to pay the importer that amount of money on or before the future date. This document has special importance in wholesale trade where large amount of money involved.
Following persons are involved in a bill of exchange: Drawer: The person who writes or prepares the bill. Drawee: The person who pays the bill. Payee: The person to whom the payment is to be made. Holder of the Bill: The person who is in possession of the bill.
On the basis of the due date there are two types of bill of exchange:
? ?
Bill of Exchange after Date: In this case the due date is counted from the date of drawing and is also called bill after date. Bill of Exchange after Sight: In this case the due date is counted from the date of acceptance of the bill and is also called bill of exchange after sight.
Insurance Certificate Also known as Insurance Policy, it certifies that goods transported have been insured under an open policy and is not actionable with little details about the risk covered. It is necessary that the date on which the insurance becomes effective is same or earlier than the date of issuance of the transport documents. Also, if submitted under a LC, the insured amount must be in the same currency as the credit and usually for the bill amount plus 10 per cent. The requirements for completion of an insurance policy are as follow:
? ? ? ? ? ? ? ? ?
The name of the party in the favor which the document has been issued. The name of the vessel or flight details. The place from where insurance is to commerce typically the sellers warehouse or the port of loading and the place where insurance cases usually the buyer's warehouse or the port of destination. Insurance value that specified in the credit. Marks and numbers to agree with those on other documents. The description of the goods, which must be consistent with that in the credit and on the invoice. The name and address of the claims settling agent together with the place where claims are payable. Countersigned where necessary. Date of issue to be no later than the date of transport documents unless cover is shown to be effective prior to that date.
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Export Declaration form/GR form: As per Indian Exchange Control regulations details of all goods exported from India are required to be declared on certain specified forms. These forms are evolved by RBI to ensure the value of goods exported from India. The form designed is so that they can have an effective check over the cycle of movement of goods and receipt of their value into foreign exchange into India. They are also known as GR forms they are submitted in duplicate to the customer or exporter, initially it was submitted to RBI every fortnight but due to ample amount of documentation involved in the process, RBI came up with process of submitting Supplementary R-Return which is a computerized form in involves defining of a purpose in it. 202 –Bank to bank 103- Bank to the customer These are some of the purpose which need to be defined on the R-Return and if any error occurs from the point of view of authorized dealer then the purposes are rectified accordingly. Export Credit Guarantee Corporation of India Limited (ECGC): ? ? ? ? ? ? Provides credit risk covers to Exporters against nonpayment risks of the overseas buyers / buyer‘s country in respect of the exports made. Provides credit Insurance covers to banks against lending risks of exporters Assessment of buyers for the purpose of underwriting Preparation of country reports. International experience to enhance Indian capabilities An ISO organisation excelling in credit insurance
Risks Covered Risk covered is of two types i.e. Commercial Risk and Political Risk. Commercial Risk: ? Insolvency of buyer/LC opening bank ? Protracted Default of buyer ? Repudiation by buyer
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Political Risk: ? ? ? ? War/civil war/revolutions Import restrictions Exchange transfer delay/embargo Any other cause attributable to importing
Specific Buyer wise Policy: ? ? ? ? ? ? ? ? Covering One buyer / One Bank Processing fee Rs.1000/Period of cover - One year All shipments to buyer on Non LC terms or shipments under LC from bank covered Quarterly/Annual premium payable upfront based on projected exports 80% cover Monthly or quarterly shipment statements 5% No Claim Bonus reduction on renewal
Multi buyer exposure policy: ? ? ? ? ? ? ? ? ? ? ? Cover on exposure as opposed to turnover and cover for more than 1 buyer Discretion to choose buyers for cover with exporter and shall be acceptable to ECGC Processing Fee Rs.5000/- to accompany application List of buyers to be given with proposal and any addition to be advised Minimum 10% of projected turnover will be fixed as Aggregate Loss Limit (ALL) which will be the Maximum Liability Exporter can opt for higher exposure than 10% of turnover Cover for each buyer is 10% of ALL as Single Loss Limit (SLL) Exporter to have access to ECGC website for checking defaulter buyer list. Coverage is 80% and lower cover available with proportionate reduction of premium. Single premium rate irrespective of country grading Upfront premium payable before issue or in quarterly installments 5% No Claim Bonus reduction on renewal.
Export Credit Insurance Covers to Banks: ? Covers for working capital granted by commercial banks to Exporters at Pre-shipment and Post shipment stages ? Covers available on exporter wise, bank branch wise and bank wise ? Losses due to protracted default/Insolvency of exporters covered ? Cover varies from 60% to 95% depending on the type of cover
Payments Collection Methods in Export Import International Trade.
Introduction:
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Payment Collection Against Bills also known documentary collection; Is a payment method used in international trade all over the world by the exporter for the handling of documents to the buyer's bank and also gives the banks necessary instructions indicating when and on what conditions these documents can be released to the importer. Collection against Bills is published by International Chambers of Commerce (ICC), Paris, France. The last updated issue of its rule was published on January 1, 1966 and is known as the URC 522. It is different from the letters of credit, in the sense that the bank only acts as a medium for the transfer of documents but does not make any payment guarantee. However, collection of documents is subjected to the Uniform Rules for Collections published by the International Chamber of Commerce (ICC).
Role of Various Parties: Exporter The seller ships the goods and then hands over the document related to the goods to their banks with the instruction on how and when the buyer would pay. Exporter's Bank The exporter's bank is known as the remitting bank, and they remit the bill for collection with proper instructions. The role of the remitting bank is to:
? ? ?
Check that the documents for consistency. Send the documents to a bank in the buyer's country with instructions on collecting payment. Pay the exporter when it receives payments from the collecting bank.
Buyer/Importer The buyer / importer is the drawee of the Bill. The role of the importer is to:
? ?
Pay the bill as mention in the agreement (or promise to pay later). Take the shipping documents (unless it is a clean bill) and clear the goods.
Importer's Bank This is a bank in the importer's country; usually a branch or correspondent bank of the remitting bank any other bank can also be used on the request of exporter.
but
The collecting bank acts as a remitting bank's agent and clearly follows the instructions on the remitting bank's covering schedule. However the collecting bank does not guarantee payment of the bills except in very unusual circumstance for undoubted customer, which is called availing. Importer's bank is known as the collecting / presenting bank. The role of the collecting banks is to :
? ?
Act as the remitting bank's agent Present the bill to the buyer for payment or acceptance.
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? ?
Release the documents to the buyer when the exporter's instructions have been followed. Remit the proceeds of the bill according to the Remitting Bank's schedule instructions.
If the bill is unpaid / unaccepted, the collecting bank:
? ? ? ?
May arrange storage and insurance for the goods as per remitting bank instructions on the schedule. Protests on behalf of the remitting bank (if the Remitting Bank's schedule states Protest) Requests further instruction from the remitting bank, if there is a problem that is not covered by the instructions in the schedule. Once payment is received from the importer, the collecting bank remits the proceeds promptly to the remitting bank less its charges.
Documents Against Payments (D/P) This is sometimes also referred as Cash against Documents/Cash on Delivery. In effect D/P means payable at sight (on demand). The collecting bank hands over the shipping documents including the document of title (bill of lading) only when the importer has paid the bill. The Drawee is usually expected to pay within 3 working days of presentation. The attached instructions to the shipping documents would show "Release Documents Against Payment"
Risks: Under D/P terms the exporter keeps control of the goods (through the banks) until the importer pays. If the importer refuses to pay, the exporter can:
? ?
Protest the bill and take him to court (may be expensive and difficult to control from another country). Find another buyer or arrange a sale by an auction.
With the last two choices, the price obtained may be lower but probably still better than shipping the goods back, sometimes; the exporter will have a contact or agent in the importer's country that can help with any arrangements. In such a situation, an agent is often referred to as a Case of Need, means someone who can be contacted in case of need by the collecting bank. If the importer refuses to pay, the collecting bank can act on the exporter's instructions shown in the Remitting Bank schedule. These instructions may include:
? ?
Removal of the goods from the port to a warehouse and insure them. . Protesting the bill through the bank's lawyer.
Documents against Acceptance (D/A)
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Under Documents against Acceptance, the Exporter allows credit to Importer, the period of credit is referred to as Usance. The importer/drawee is required to accept the bill to make a signed promise to pay the bill at a set date in the future. When he has signed the bill in acceptance, he can take the documents and clear his goods. The payment date is calculated from the term of the bill, which is usually a multiple of 30 days and start either from sight or form the date of shipment, whichever is stated on the bill of exchange. The attached instruction would show "Release Documents Against Acceptance". Risk: Under D/A terms the importer can inspect the documents and ,if he is satisfied, accept the bill for payment o the due date, take the documents and clear the goods the exporter loses control of them.
The exporter runs various risks. The importer might refuse to pay on the due date because :
? ? ? ? ?
He finds that the goods are not what he ordered. He has not been able to sell the goods. He is prepared to cheat the exporter (In cases the exporter can protest the bill and take the importer to court but this can be expensive). The importer might have gone bankrupt, in which case the exporter will probably never get his money.
Usance D/P Bills A Usance D/P Bill is an agreement where the buyer accepts the bill payable at a specified date in future but does not receive the documents until he has actually paid for them. The reason is that airmailed documents may arrive much earlier than the goods shipped by sea. The buyer is not responsible to pay the bill before its due date, but he may want to do so, if the ship arrives before that date. This mode of payments is less usual, but offers more settlement possibility. These are still D/P terms so there is no extra risk to the exporter or his bank. As an alternative the covering scheduled may simply allow acceptance or payments to be deferred awaiting arrival of carrying vessel. There are different types of Usance D/P bills, some of which do not require acceptance specially those drawn payable at a fix period after date or drawn payable at a fixed date. Bills requiring acceptance are those drawn at a fix period after sight, which is necessary to establish the maturity date. If there are problems regarding storage of goods under a Usance D/P bill, the collecting bank should notify the remitting bank without delay for instructions.
Guidelines from FEDAI:
Foreign Exchange Dealers Association of India (FEDAI) was established in 1958 under the Section 25 of the Companies Act (1956). It is an association of banks that deals in Indian foreign exchange and work in coordination with the Reserve Bank of India, other organizations like FIMMDA, the Forex Association of India and various market participants. It has an advantage over that of the authorized dealers who are now allowed by the RBI to issue stand by letter of credits towards import of goods. As the issuance of standby of letter of Credit including imports of goods is susceptible to some risk in the absence of evidence of shipment, therefore the importer should be advised that documentary credit under UCP 500/600 should be the preferred route for importers of goods.
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Main Role of FEDAI is as follows: 1. Formulating uniform rules and Guidelines for authorized dealers ensuring a level playing field for the participants and harmonizing the interest of Authorised Dealers and Customers. 2. Associating itself with RBI in promoting growth in India‘s Export and Import trade. 3. Granting authorization to brokers and monitoring the broking activity in Forex market. 4. Providing guidance and information to members in foreign exchange business. 5. To work with member banks to identify the industry‘s key priorities and targets. 6. To contribute to the development of the foreign exchange market- its efficiency, depth and liquidity. 7. To promote best practices for efficient conduct of business including development and maintenance of derivatives and their documentation. 8. To set up a machinery for swift resolution of disputes amongst member banks and their customer. 9. To undertake studies of new exotic products that is sprouting in the international markets and to create conditions for introducing them in the Indian market. 10. To help the member banks for adapting to various products offered in the market. 11. To bring out a periodical Review/Journal on forex related matters.
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OVERVIEW OF INDIAN CURRENCY MARKET
During the early 1990s, India embarked on a series of structural reforms in the foreign exchange market. The exchange rate regime, that was earlier pegged, was partially floated in March 1992 and fully floated in March 1993. The unification of the exchange rate was instrumental in developing a market-determined exchange rate of the rupee and was an important step in the progress towards total current account convertibility, which was achieved in August 1994. Although liberalization helped the Indian Forex market in various ways, it led to extensive fluctuations of exchange rate. This issue has attracted a great deal of concern from policymakers and investors. While some flexibility in foreign exchange markets and exchange rate determination is desirable, excessive volatility can have an adverse impact on price discovery, export performance, sustainability of current account balance, and balance sheets. In the context of upgrading Indian foreign exchange market to international standards, a well developed foreign exchange derivative market (both OTC as well as Exchange-traded) is imperative. With a view to enable entities to manage volatility in the currency market, RBI on April 20, 2007 issued comprehensive guidelines on the usage of foreign currency forwards, swaps and options in the OTC market. At the same time, RBI also set up an Internal Working Group to explore the advantages of introducing currency futures. The Report of the Internal Working Group of RBI submitted in April 2008, recommended the introduction of Exchange Traded Currency Futures. Subsequently, RBI and SEBI jointly constituted a Standing Technical Committee to analyze the Currency Forward and Future market around the world and lay down the guidelines to introduce Exchange Traded Currency Futures in the Indian market. The Committee submitted its report on May 29, 2008. Further RBI and SEBI also issued circulars in this regard on August 06, 2008. Currently, India is a USD 34 billion OTC market, where all the major currencies like USD, EURO, YEN, Pound, Swiss Franc etc. are traded. With the help of electronic trading and efficient risk management systems, Exchange Traded Currency Futures will bring in more transparency and efficiency in price discovery, eliminate counterparty credit risk, provide access to all types of market participants, offer standardized products and provide transparent trading platform. Banks are also allowed to become members of this segment on the Exchange, thereby providing them with a new opportunity. Source :-( Report of the RBI-SEBI standing technical committee on exchange traded currency futures) 2008.
CURRENCY DERIVATIVE PRODUCTS
Derivative contracts have several variants. The most common variants are forwards, futures, options and swaps. We take a brief look at various derivatives contracts that have come to be used.
? Spot
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A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira and Russian Ruble, which settle the next business day), 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.
? FORWARD: The basic objective of a forward market in any underlying asset is to fix a price for a contract to be carried through on the future agreed date and is intended to free both the purchaser and the seller from any risk of loss which might incur due to fluctuations in the price of underlying asset.
A forward contract is customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price. The exchange rate is fixed at the time the contract is entered into. This is known as forward exchange rate or simply forward rate.
? FUTURE: A currency futures contract provides a simultaneous right and obligation to buy and sell a particular currency at a specified future date, a specified price and a standard quantity. In another word, a future contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Future contracts are special types of forward contracts in the sense that they are standardized exchange-traded contracts.
? SWAP: Swap is private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolio of forward contracts. The currency swap entails swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. There are a various types of currency swaps like as fixed-to-fixed currency swap, floating to floating swap, fixed to floating currency swap. In a swap normally three basic steps are involve. (1) Initial exchange of principal amount (2) Ongoing exchange of interest (3) Re - exchange of principal amount on maturity.
? OPTIONS : Currency option is a financial instrument that give the option holder a right and not the obligation, to buy or sell a given amount of foreign exchange at a fixed price per unit for a specified time period ( until the expiration date ). In
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LALA LAJPATRAI INSTITUTES OF MANAGEMENT other words, a foreign currency option is a contract for future delivery of a specified currency in exchange for another in which buyer of the option has to right to buy (call) or sell (put) a particular currency at an agreed price for or within specified period. The seller of the option gets the premium from the buyer of the option for the obligation undertaken in the contract. Options generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer dated options are called warrants and are generally traded OTC.
Currency risk is a type of risk in international trade that arises from the fluctuation in price of one currency against another. This is a permanent risk that will remain as long as currencies remain the medium of exchange for commercial transactions. Market fluctuations of relative currency values will continue to attract the attention of the Exporter, the manufacturer, the investor, the banker, the speculator, and the policy maker alike. While doing business in foreign currency, a contract is signed and the company quotes a price for the goods using a reasonable exchange rate. However, an Economic Events may upset even the best laid plans. In order to avoid Exchange Risk fluctuations the companies generally form strategy for dealing with exchange rate risk: 1. Currency Hedging: Currency hedging is technique used to avoid the risks associated with the changing value of currency while doing transactions in international trade. It is possible to take steps to hedge foreign currency risk. This may be done through one of the following options: 2. Billing foreign deals in Indian Rupees: This insulates the Indian exporter from Currency fluctuations. However, this may not be acceptable to the foreign buyer. Most of international trade transactions take place in one of the major foreign Currencies USD, Euro, Pounds Sterling, and Yen. 3. Forward contract. You agree to sell a fixed amount of foreign exchange (to convert this into your currency) at a future date, allowing for the risk that the buyer‘s payments are late. Options: You buy the right to have currency at an agreed rate within an agreed period. For example, if you expect to receive $35,000 in 3 months, time you could buy an option to convert $35,000 into your currency in 3 months. Options can be more expensive than a forward contract, but you don't need to compulsorily use your option.
4.
5. Foreign currency bank account and foreign currency borrowing: These may be suitable where you have cost in the foreign currency or in a currency whose exchange rate is related to that currency.
FOREIGN EXCHANGE BASICS
Foreign Exchange is a mechanism by which the Currency of one Country can be converted in to the currency of another country. This mechanism is used for either receiving or making payment in connection with foreign transaction. The Forex Market consists of the players like Banks, Financial Institutions, Brokers, Central Banks, Corporate and the Public at large etc. The Forex Deals - Merchant deals or InterBank deals-are undertaken by dealers who are engaged in buying and selling of the foreign currencies on behalf of the bank. The
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foreign currency market is a very big global market. It is bigger market than the stock market and the volume of the currency trade is to the tune of USD.3.21 trillion dollars per day. The bulk of the Forex market is ?Over the Counter? (OTC) market i.e. trades are effected on telephone/telex/fax, through electronic dealing systems or intermediation of brokers and not on the floor or pit of an exchange. The major participants of the market are Market Players and Market Makers: Market Makers are the ones who fix prices i.e. Dollar vs. Rupee by applying various models; basically they are in line with the purchasing power parity but are complex in nature. Market Players are the ones who are participating by holding positions in it. The market players mainly comprise of: ? Non bank entities that wish to exchange currencies to meet or hedge contractual commitments ? Speculators ? Arbitrageurs
? Hedging: Presume Entity A is expecting a remittance for USD 1000 on 27 August 08. Wants to lock in the foreign exchange rate today so that the value of inflow in Indian rupee terms is safeguarded. The entity can do so by selling one contract of USDINR futures since one contract is for USD 1000. Presume that the current spot rate is Rs.43 and ?USDINR 27 Aug 08‘ contract is trading at Rs.44.2500. Entity A shall do the following: Sell one August contract today. The value of the contract is Rs.44,250. Let us assume the RBI reference rate on August 27, 2008 is Rs.44.0000. The entity shall sell on August 27, 2008, USD 1000 in the spot market and get Rs. 44,000. The futures contract will settle at Rs.44.0000 (final settlement price = RBI reference rate). The return from the futures transaction would be Rs. 250, i.e. (Rs. 44,250 – Rs. 44,000). As may be observed, the effective rate for the remittance received by the entity A is Rs.44. 2500 (Rs.44,000 + Rs.250)/1000, while spot rate on that date was Rs.44.0000. The entity was able to hedge its exposure. ? Speculation: Bullish, buy futures Take the case of a speculator who has a view on the direction of the market. He would like to trade based on this view. He expects that the USD-INR rate presently at Rs.42, is to go up in the next two-three months. How can he trade based on this belief? In case he can buy dollars and hold it, by investing the necessary capital, he can profit if say the Rupee depreciates to Rs.42.50. Assuming he buys USD 10000, it would require an investment of Rs.4, 20,000. If the exchange rate moves as he expected in the next three months, then he shall make a profit of around Rs.10000. This works out to an annual return of around 4.76%. It may please be noted that the cost of funds invested is not considered in computing this return. A speculator can take exactly the same position on the exchange rate by using futures contracts. Let us see how this works. If the INR- USD is Rs.42 and the three month futures trade at Rs.42.40. The minimum contract size is USD 1000. Therefore the speculator may buy 10 contracts. The exposure shall
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be the same as above USD 10000. Presumably, the margin may be around Rs.21, 000. Three months later if the Rupee depreciates to Rs. 42.50 against USD, (on the day of expiration of the contract), the futures price shall converge to the spot price (Rs. 42.50) and he makes a profit of Rs.1000 on an investment of Rs.21, 000. This works out to an annual return of 19 percent. Because of the leverage they provide, futures form an attractive option for speculators. ? Speculation: Bearish, sell futures
Futures can be used by a speculator who believes that an underlying is over-valued and is likely to see a fall in price. How can he trade based on his opinion? In the absence of a deferral product, there wasn't much he could do to profit from his opinion. Today all he needs to do is sell the futures. Let us understand how this works. Typically futures move correspondingly with the underlying, as long as there is sufficient liquidity in the market. If the underlying price rises, so will the futures price. If the underlying price falls, so will the futures price. Now take the case of the trader who expects to see a fall in the price of USD-INR. He sells one two-month contract of futures on USD say at Rs. 42.20 (each contact for USD 1000). He pays a small margin on the same. Two months later, when the futures contract expires, USD-INR rate let us say is Rs.42. On the day of expiration, the spot
and the futures price converges. He has made a clean profit of 20 paise per dollar. For the one contract that he sold, this works out to be Rs.2000. ? Arbitrage: Arbitrage is the strategy of taking advantage of difference in price of the same or similar product between two or more markets. That is, arbitrage is striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. If the same or similar product is traded in say two different markets, any entity which has access to both the markets will be able to identify price differentials, if any. If in one of the markets the product is trading at higher price, then the entity shall buy the product in the cheaper market and sell in the costlier market and thus benefit from the price differential without any additional risk. One of the methods of arbitrage with regard to USD-INR could be a trading strategy between forwards and futures market. As we discussed earlier, the futures price and forward prices are arrived at using the principle of cost of carry. Such of those entities who can trade both forwards and futures shall be able to identify any mispricing between forwards and futures. If one of them is priced higher, the same shall be sold while simultaneously buying the other which is priced lower. If the tenor of both the contracts is same, since both forwards and futures shall be settled at the same RBI reference rate, the transaction shall result in a risk less profit. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies. Geographically, the markets span all the time zones from New Zealand to the West Coast of the United States. When it is 3:00 PM in Tokyo, it is 2:00 PM in Hong Kong. When it is 3:00 PM in Hong Kong, it is 1:00 PM in Singapore. At 3:00 PM in Singapore, it is 12:00 noon in Bahrain. When it is 3:00 PM in Bahrain, it is noon in Frankfurt and Zurich, and 11:00 AM in London. When it is 3:00 PM in London, it is 10:00 AM in New York. By the time New York is starting to wind down at 3:00 PM, it is noon in Los Angeles. By the time it is 3:00 PM in Los Angeles, it is 9:00 AM of the next day in Sydney. The gap between New York closing and Tokyo opening is about 2.5 hours. Thus, the market functions 24 hours enabling a trader to offset a position created in one market using another market.
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INDIA BALANCE OF PAYMENTS (BOP)
KEY INDICATORS OF INDIA'S BALANCE OF PAYMENTS
2007-08 Merchandize Trade Exports ($ on BoP basis) Growth Rate (percent) Imports ($ on BoP basis) Growth Rate (percent) Crude Oil Prices, Per Barrel (Indian Basket) Trade Balance ($ billion) Invisibles Net Invisibles ($ Billion) Net Invisibles Surplus/Trade Deficit (Percent) Invisible Receipts/Current Receipts (Percent) Services Receipts/Current Receipts (Percent) Private Transfers/Current Receipts (Percent) Current Account Current Receipts ($ Billion) Current Payments ($ Billion) Current Account Balance ($ Billion) Capital Account Gross Capital Inflows ($ Billion) Gross Capital Outflows ($ Billion) Net Capital Flows ($ Billion) Net FDI/Net Capital Flows (Percent) Net Portfolio Investment/Net capital Flows (Percent) Net ECBs/Net capital Flows (Percent) Reserves Import Cover of Reserves (In months) Outstanding Reserves as at end period ($ Billion)
2008-09
2008-09 (Q1) (PR) 43.0 42.9 118.8 -31.4 22.4 71.3 44.2 26.2 13.8
2009-10 (Q1) (P)
28.9 35.2 79.2 -91.6 74.6 81.4 47.2 28.6 13.8
5.4 14.3 82.4 -119.4 89.6 75.0 48.1 30.0 13.7
-21.0 -19.6 63.9 -26.0 20.2 77.7 49.9 28.9 17.2
314.8 331.8 -17.0 433.0 325.0 108.0 14.3 27.4 21.0 14.4 309.7
337.7 367.6 -29.8 302.5 293.3 9.1 191.3 -153.4 89.2 10.3 252.0
88.1 97.1 -9.0 90.9 79.7 11.1 80.5 -37.8 13.2 13.3 312.1
77.5 83.3 -5.8 78.5 71.8 6.7 101.4 122.7 -5.3 11.4 265.1
Balance of Payment Balance of Payment can be stated as the underlying reason for the foreign exchange of a country. Balance of Payments (BOP) is a systematic accounting record of a country‘s economic transactions with the rest of the world (ROW) during a given period of time. In other words, (BOP) shows a systematic accounting record of a nation‘s international transactions in goods, services, rewards to factors of
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Production, unilateral transfers, real capital, financial capital and official reserves during a period of one year.
Different types of economic transactions in BoP ? ? ? ? ? Exports of goods and services and the Payments received- one real transfer and one financial transfer Exports in return for imports or an international barter transaction- two real transfers Purchase of foreign securities by drawing a cheque on your foreign deposits-two financial transfers Unilateral gifts send abroad in kind- one real transfer Unilateral financial gifts- one financial transfer.
Components of BOP A. Current Account B. Capital Account C. Official Reserve Account (Monetary movements) A. Current Account Current account records transactions in goods or merchandise and invisibles with the rest of the world. ? Trade or Merchandise or Visible Account
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Trade or merchandise account covers exports and imports of all movable goods (cleared at customs barriers) which are visible in physical form, where the ownership of goods changes from residents to non-residents and vice versa. ? Invisible Account Invisible account covers exports and imports of all non- factor services; all transfer payments; and all income earned by residents on ownership of foreign financial and real assets.
Trade Balance + Invisible Balance= Current Account Balance B. Capital Account Capital account records a country‘s international transactions in financial capital and real assets . It mainly comprises foreign direct investment, foreign Portfolio Investment and other International banking flows like External Commercial Borrowings and NRI Deposits. Surplus and Deficit in Overall BOP BOP = Current Account Balance + Capital Account Balance BOP Surplus if this is Positive, BOP Deficit if this difference is negative C. Official Reserve account It records offsetting transactions like changes in foreign exchange reserves. Current Account Balance + Capital Account Balance + Official Reserve Balance = Zero as per Walrus Rule.
Different Card Rates at Banks Exchange Rate Calculations Forex contracts are for ?cash? or ?ready? delivery which means delivery same day, ?value next day? which means delivery next business day and ?spot? which is two business days ahead. The rates quoted by banks to their non-bank customers are called ?Merchant Rates?. Banks quote a variety of exchange rates. The so-called ?TT? rates are applicable for clean inward or outward remittances. ?TT buying rate? applies when an exporter asks the bank to collect an export bill and the bank pays the exporter only when it receives payment from the foreign buyer as well as in cancellation of forward sale contracts. ?TT selling rate? is applicable when the bank sells a foreign currency draft.
Different types of rates used in forex transactions:
Selling rates-
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?
TT Selling Rate – These rates are used for issue of Outward DD, MT & TT. This rate is calculated as: TT Selling Rate = A Base Rate + Exchange Margin The base rate is the inter-bank spot selling rate. The exchange margin is subject to a ceiling specified by the FEDAI (Foreign Exchange Dealers‘ Association of India).
Also for cancellation of purchase earlier made in foreign currency1. When refunding in foreign currency mail transfers and demand drafts converted in to Rupees. 2. Delinking / refund of foreign bills purchased / negotiated in foreign currency. ? Bill Selling Rate- Retirement of import bills under L.C. or collection. When an importer requests the bank to make a payment to a foreign supplier against a bill drawn on the importer, the banker has to handle documents related to the transaction. For this, the bank loads another margin over the TT selling rate to arrive at the Bill Selling Rate. Thus, Spot Bill Selling Rate = TT Selling Rate + Exchange Margin Travelers‘ Cheques Selling Rate- For sale of FTC. Rate applicable when a customer buys Foreign Currency Travelers ?cheques from the bank. FC Notes Selling Rate- For sale of Foreign Currency notes. Rate applicable when a customer buys Foreign Currency Cash from the bank.
? ?
Buying Rates? TT Buying Rate- Rate at which a Foreign Inward Remittance received by Telegraphic Transfer is converted into rupees. For converting all inward remittances in foreign currencies where the cover has been received. And hence for converting all outward bills sent for collection also. Cancellation of outward remittances like DD/MT sent by bank. This rate is calculated as: Spot TT Buying Rate = A Base Rate – Exchange Margin The base rate is the inter-bank rate. The purpose of exchange margin is to recover the costs involved and provide a profit margin to the bank. Bill Buying Rate- For purchase / discounting / negotiations of export documents. This rate is calculated as: Spot Bill Buying Rate = Inter-bank forward rate for a forward tenor equal to transit plus issuance period of the bill of any exchange margin For a forward bill purchase, the bank will start from the inter-bank forward rate for a tenor, which includes •Interval between current time and delivery date of the bill •Transit period •Issuance period of the bill and deduct an exchange margin Clean Cheque Buying Rate- When foreign currency instrument is purchased especially cheques where the realization will take place at a later date. TC Buying Rate- For encashment of travelers‘ cheques. Rate at which Foreign Currency Travellers cheques‘ deposited by the customer is converted into rupees. Currency Buying Rate- For encashment of currency notes. Rate at which Foreign Currency Cash deposited by the customer is converted into rupees.
?
? ? ?
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Foreign Exchange Mechanism
Types of transactions and settlement dates Settlement of a transaction takes place by transfer of deposits between the two parties and the day when these transactions are in effect is called the settlement date or the value date. The countries where the transfers take place are called settlement locations. The locations of the two banks in the countries of the two currencies involved in the trade, are dealing locations, which need not be the same as settlement locations. For e.g. a London bank can sell Swiss francs against US dollar to a Paris bank. Settlement locations may be New York and Geneva, while dealing locations are London and Paris. Depending upon the time elapsed between the transaction date and the settlement date; FOREX transactions can be categorized into ?spot‘ and ?forward‘ transactions. A third category called ?swaps‘ is a combination of a spot and a forward transaction.
In a spot transaction, the settlement or value date is two business days (T+2)ahead for European currencies, or the Yen traded against the dollar. The two-day period gives adequate time for the parties to send instructions to debit and credit the appropriate bank accounts at home and abroad. A complete requirement under the forex regulations and the exchange rate at which the transaction takes place is called the spot rate. A forward transaction involves an agreement today to buy or sell a specified amount of a foreign currency at a specified future date at a rate agreed upon today. It is a price at which a particular amount of a commodity, currency or security is to be delivered on a fixed date in the future, possibly as for as a year ahead. Traders agree to buy and sell currencies for settlement at least three days later, at predetermined exchange rates. This type of transaction often is used by business to reduce their exchange rate risk. The typical forward contract is for one month; three months; or six months, with three months being most common. Forward contracts for longer periods are not as common because of the great uncertainties involved. However, forward contract can be renegotiated for one or more periods when they become due. The equilibrium forward rate is determined at the intersection of the market demand and supply forces of forex for future delivery. The demand and supply of forward forex arise in the course of hedging, from forex speculation and from covered interest arbitrage
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Forward Price vs. Spot Price It is possible for a forward price of a currency to equal its spot price However, interest rates must be considered. The interest rate can be earned by holding different currencies usually varies, therefore forward price can be higher or lower than (at premium or discount to) the spot prices. It adds in Premium of every month it defines the time value of money in that period or that month on the basis of predictions about the growth and information of the market. RBI Reference Rate: There reference rate given by RBI is based on 12 noon rates of a few selected banks in Mumbai. Inter Bank Rates: Interbank rates are the rates which are quoted by the bank for buying and selling foreign currency in the interbank market, which works on wafer thin margins. For inter bank transactions the quotation is up to four decimals with the last two digits in multiples of 25. This market has certain peculiarity about itself i.e. the intention of the other party is not known so they quote both Bid and ask rates. Foreign Currency A/Cs: The accounts maintained by banks in various foreign currencies at foreign centers to facilitate dealings in foreign exchange. They are known as Nostro A/cs. AD‘s route all their forex transactions through the Nostro a/cs. A US Dollar account opened by our Treasury Branch with a Citibank New York will be known as Nostro account. Similarly, a rupee account opened with our ?A‘ category branch by a foreign branch or a foreign bank will be designated as Vostro account. London Branch maintaining INR A/c with the Mumbai Overseas Branch is a Vostro A/c. When London Branch draws a DD in INR on any ?A? or ?B? category branch, the same will be paid to the debit of London Branch Vostro a/c with Mumbai Overseas Branch. The foreign currency rates may be quoted in two ways: Direct Quotations/Home Currency Quotation. E.g. US$.1= Rs.40.50. In this case, amount of foreign currency is fixed while the equivalent amount of home currency is variable. Maxim used for the transaction is ?Buy low; Sell high?. Bank will always buy foreign currency at lower rate i.e. they will part with minimum amount of home currency and try to acquire as much of foreign currency as possible. While selling the foreign currency, bank will acquire as much of home currency as possible and part with as less of foreign currency as possible. Buying transaction – US$1 = Rs.40.52 & Sale transaction – US$1 = Rs.40.62
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Indirect Quotation or Foreign Currency Quotation: The example of this quotation is Rs.100 = US$.2.47. In this case, home currency unit is fixed while the foreign currency unit is variable. Maxim used for the transaction is ?Buy high; Sell low?. In this case, bank will try to buy as much of foreign currency as possible at the fixed amount of home currency i.e. at Rs.100.00. And, while selling the foreign currency, the bank will acquire as much of home currency as possible. Buying transaction- Rs.100.00 = US$.2.4695 & Sale transaction – Rs.100.00 = US$. 2.4615.
Two-way quotes \Bid and Ask: In all foreign exchange quotations offered by a dealer, there will always be two- figure- the buying rate and the selling rate. Bid is the highest price that the seller is offering for the particular currency. On the other hand, ask is the lowest price acceptable to the buyer. Together, the two prices constitute a quotation and the difference between the price offered by a dealer willing to sell something and the price he is willing to pay to buy it back. The bid-ask spread is amount by which the ask price exceeds the bid. This is essentially, the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it. For example, if the bid price is $20 and the ask price is $21 then the "bid-ask spread" is $1. The spread is usually rates as percentage cost of transacting in the forex market, which is Computed as follow: In the direct quotation, lower of the two rates will be a buying rate and the higher of the two rates will be a selling rate. If exchange rate is between USD and INR, then it will be quoted as followsUSD.1.00 =Rs.40.52- 40.57, The buying rate will be Rs.40.52 & selling rate will be Rs.40.57. If the Quotation is indirect, higher of the two rates will be buying rate and the lower of the two rates will be selling rate. Rs.100.00 = USD2.4695—2.4615 In the above quotation, the Buying rate will be USD2.4695 & Selling rate will be USD2.4615. When the two parties enter in to a contract and agree to exchange foreign currencies, they may deliver in one of the following manner: 1. On the same day- it will be called as ?Cash Transaction?. 2. Next day- it will be called as TOM Basis. 3. Within two banking days - on Spot Basis. It normally happens that the transfer of funds from one bank to another bank take time which should not more than two banking days from the next date of transaction. Both the banks may be maintaining foreign currency A/c at different banks and it may take some time to materialize the transaction. So, in the spot transaction, the settlement of payment will take two working days excluding holidays, if any. 4. If the delivery takes place beyond spot, the transaction will be termed as forward transaction. The period of delivery (of currency) will depend on the underlying contract. The forward transaction will normally be done to hedge adverse movement of exchange rate.
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And in case the delivery of currency is for longer period- say over one year-, the forward contract may be rolled over to hedge the risk. Forward contract may be for sale or purchase of foreign currency. Exchange rate is continuously changing and the rate may or may not be the same in future. The rate may be either costlier or cheaper or same. If the rate is costlier then the currency will be at premium. If rate is cheaper, it will be at discount and If the rate is same, it will be called at par. The forward rate may be arrived at as follows, depending upon whether it is at premium or at discount: Spot Rate + Premium = Forward Rate Spot Rate – Discount = Forward Rate For example, if the spot rate for US Dollar in the Forex market is as follows: USD. 1.00 = Rs.40.55 and one month premium is Rs.0.30. Then the forward rate will be quoted by adding premium to the spot rate --USD.1.00 = Rs.40.55 + 0.30 = Rs.40.85. Similarly, if the dollars is at a discount and for one month forward it is Rs.0.25. In that case, one month forward quotation for dollar, will be obtained by deducting discount from the spot rate-Rs.40.55-Rs.0.25 = Rs.40.30.
The Rule for Forward Rate – The premium should be added and the discount should be deducted from the spot rate. The rule applies to both sale and purchase transactions. In market quotations, the rates are quoted in two ways – one for purchase and another for sale. Similarly, the premium and discount are also quoted in two ways, one for purchase and another for sale. Spot- USD.1.00 = Rs.40.55 – 44.65 One month premium: 00.30-- 00.35 In purchase transaction, the bank would like to pay to the seller as much less an amount as possible for per unit of foreign currency. When currency is at premium, it means addition of premium to the spot rate. Lower of the two rates should be added to the spot rate. In the above example the spot-buying rate is Rs.40.55 and of the two premia, Rs.0.30 being lesser will be advantages to bank and therefore forward rate for one month would be Rs.40.85. The other premium- Rs.0.35-- that is higher between the two should not be added. In case of sale transaction, the spot rate is Rs.40.65 and forward premium is Rs.0.35, which is higher of the two. The forward sale rate would be USD.1.00 =Rs.40.95. This gives us the rule that – Add lesser premium for the buying rates & add higher premium for selling rate.
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Financial Indicators
Financial indicators form a part of the major parameter as it reveals the financial soundness of the company and helps in drawing conclusion. For calculating the working capital requirement, the company‘s financials are taken into consideration i.e. their assets and liabilities. Liabilities are further divided into current liabilities, term liabilities and net worth. Current liabilities are liabilities which are payable within 1 year. It also includes working capital bank finance, provision for tax and other statutory liability like rent, electricity etc. Working Capital bank finance is to be repayable on demand. Term Liabilities are liabilities which are payable after the duration of 3 years. Net worth includes the net worth of the client i.e. their Equity share capital and Reserves & Surplus. Assets are further divided into current assets, non-current assets like investment and advance for fixed assets, fixed assets and intangible assets like goodwill, patent, copyright. For testing the financial status of the company certain ratios are calculated like Current Ratio, Debt Equity Ratio, Quasi Debt Equity Ratio, Profitability Ratio, Interest Service Coverage Ratio and Debt Service Coverage Ratio. Ratios:
A) Current Ratio = Current Assets Current Liability Current Ratio denotes the liquidity position of the company and how fast the current assets can be liquidated in order to fund the current liabilities. The ideal ratio in case of Diamond Industry is 1.33: 1. B) Debt Equity Ratio = Debt Equity Debt is also known as the external liability and Equity denotes the internal liability of a company. This ratio indicates the company‘s total outside liabilities vis-à-vis their capital/ net worth. The ideal ratio in case of diamond industry is 3:1 as banks are of opinion that they are ready to finance 75% provided 25% is put by the exporter himself from his pocket.
Debt Equity Ratio = TOL (Total Outside Liability) Tangible Net Worth
Tangible Net Worth = Capital + Free Reserves.
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If any of the client invest in group companies which are generally not realizable immediately, if the investment in these companies is more than 10% then it is generally reduced from the Tangible Net Worth to arise at the Adjusted Net Worth then the DebtEquity Ratio is calculated on Adjusted Tangible Net Worth. C) Quasi Debt Equity Ratio = Total Outside Liability – Unsecured Loan Tangible Net Worth + Unsecured Loan
The Unsecured Loans which are taken by the Diamond trader are mostly loans taken from friends and relatives so they are treated as Quasi Capital. Most of the times banks do keep a track of the same as these Quasi Capitals are short term in nature. When the Debt-Equity Ratio is below 3:1 then Quasi Debt Equity Ratio is taken into consideration.
D) Profitability Ratio = Net Profit Sales This takes into account the profitability of the business in percentage to sales. In Banking Industry it is mainly from 0.5% to 1.5%. E) Interest Coverage Ratio = Cash Accrual + Interest Interest This ratio is calculated in order to ascertain whether the company is in position to pay the interest without any hassles. The minimum ratio expected is 1.5 by the banks. Interest is the interest charged by the bank Cash Accrual = Net profit + Depreciation. F) Debt Service Coverage Ratio = Net Profit + Depreciation + Interest on term Loan + Installment of term Loan ___________________________________________ Installment of term loan + Interest on term Loan This ratio is generally worked out when term loans are granted to the client. Term Loan is generally repayable after a time lag of 3 years. Its main objective is to service debt. Ideally this ratio should be 1.5:1.It is worked out by adding Cash Accrual with interest on term loan divided by installments and interest in order to find out whether the company is in position to pay interest and installment together.
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Global Indicators: Greece Crisis 2010:
Greece has chronic difficulty in funding its government expenditures out of tax revenues because of rampant tax evasion. The global downturn, which has driven up unemployment in Greece (to 10 percent) and this has further led to bankruptcy of the Greece Economy. Its national debt, most of it owed to foreigners, of some $400 billion is greater than its Gross Domestic Product, and its current annual budget deficit is almost 13 percent of GDP, which means that its indebtedness is growing rapidly
Year 2010 2009 2008 2007
Jan 46.1 48.79 39.32 44.33
Feb 46.41 49.58 39.74 44.13
Mar 45.45 51.12 40.32 43.94
Apr 44.47 50.02 39.95 42.07
May 45.99 48.6 41.98 40.86
Jun 46.54 47.73 42.85 40.81
Jul 48.36 42.77 40.43
Aug
Sep
Oct
Nov
Dec
48.34 48.38 46.8 46.61 46.55 42.97 45.69 48.77 49.2 48.47 40.87 40.22 39.51 39.44 39.42
Despite the measures taken by the government, it is desperately seeking financial aid from EU countries and International Monetary Fund. The economy still needs to borrow more money at lower interest rates from private lenders in order to avoid defaulting on its public debt or reducing government spending even more sharply than it is doing as further reduction will lead to serious political consequences. The debt crisis ensuing in Greece seems to be impacting currencies and prices of commodities like oil in a big way. Not only has it dashed the hopes of the Euro to emerge as an alternative reserve currency to the US dollar, but has actually propped up the latter due to emerging risk and investors seeking shelter in the safe haven of the US dollar
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The problems plaguing the Euro are not limited only to the Greek crisis, but debt problems in the nations of Portugal, Spain and Italy are adding to Euro woes as well. Similar debt issues had led to a decline in the US dollar
47.5 47 46.5 46 45.5 45 44.5 44
TTB BLB BLS TTS BLB TTB TTS BLS
However, with the recent debt problems unfolding in the Euro zone, the Euro seems to have been hit by a double whammy resulting in it losing some of its sheen. While, the Euro zone debt crisis has hit the Euro directly, the economic uncertainty in the Euro zone is leading investors to take cover under the safety of the US dollar. So the dollar has got appreciated from 17th May 2010-21st May 2010 majorly i.e. from (Rs.45 47.33) app.
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SUGGESTION: ? Online System should be set up for punching rates directly from the branch instead of calling in dealing room at treasury department at BKC, Mumbai. The swift message should be linked with Finnacle so that no separate registers are to be maintained by the branch which leads to reduction of paper work.
?
BIBLIOGRAPHY:
? ? ? ? ?
www.rbi.org www.investopedia.com Journal of FEDAI Export circular of RBI www.nseindia.com
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doc_789140766.docx
It describes the FOREX (Foreign Exchange market) is an International foreign exchange market, where money is sold and bought freely. In its present condition FOREX was launched in the 1970s, when free exchange rates were introduced and only the participants of the market determine. The price of one currency against the other proceeding from supply and demand.
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ACKNOWLEDGEMENT
I would like to express my gratitude to all those who made it possible for me to complete this project. I want to give special thanks to Mr.S.K.Somaniji, the (Branch DGM) and Mr. Suresh N. Patel the Senior Manager of FOREX Department at the Opera House Branch, Bank of India for giving me permission to commence this project in the first instance, to do the necessary research work and to use departmental data for research and encourage me to go ahead with my project.
I also want to thank Mr. Jhala (Branch Chief Manager) and all the officers Mr. Patankar, Ms Zareen Engineer, Mr. Bantwal, Mrs. Shalakha of FOREX Department and also, Mr. Abhyankar ( Incharge of CREDIT Department), Mr. Nair and Mr. Swapnil Patil of CREDIT Department Who supported me in my project work. I also want to specially thank Mr. Kulkarni, the Staff manager and Mr.Somaniji (Branch DGM) for arranging factory visit to Poddar Diamond for us and also helped us to learn the actual working of bank.
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INTRODUCTION OF BANK OF INDIA
Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from Mumbai. The Bank was under private ownership and control till July 1969 when it was nationalised along with 13 other banks. Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakh and 50 employees, the Bank has made a rapid growth over the years and blossomed into a mighty institution with a strong national presence and sizable international operations. In business volume, the Bank occupies a premier position among the nationalised banks. The Bank has 3101 branches in India spread over all states/ union territories including 141 specialized branches. These branches are controlled through 48 Zonal Offices. There are 29 branches/ offices (including three representative offices) abroad. The Bank came out with its maiden public issue in 1997 and follow on Qualified Institutions Placement in February 2008. Total number of shareholders as on 30/09/2009 is 2,15,790. While firmly adhering to a policy of prudence and caution, the Bank has been in the forefront of introducing various innovative services and systems. Business has been conducted with the successful blend of traditional values and ethics and the most modern infrastructure. The Bank has been the first among the nationalised banks to establish a fully computerized branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction of the Health Code System in 1982, for evaluating/ rating its credit portfolio. The Bank's association with the capital market goes back to 1921 when it entered into an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is an association that has blossomed into a joint venture with BSE, called the BOI Shareholding Ltd. to extend depository services to the stock broking community. Bank of India was the first Indian Bank to open a branch outside the country, at London, in 1946, and also the first to open a branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a network of 29 branches (including five representative offices) at key banking and financial centers viz. London, New york, Paris, Tokyo, Hong-Kong and Singapore. The international business accounts for around 17.82% of Bank's total business.
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Mission "To provide superior, proactive banking services to niche markets globally, while providing cost-effective, responsive services to others in our role as a development bank, and in so doing, meet the requirements of our stakeholders".
Vision "To become the bank of choice for corporate, medium businesses and up market retail customers and to provide cost effective developmental banking for small business, mass market and rural markets
Opera House Branch
This project was done in Bank of India, Opera House, Charni Road, Mumbai. The project was to learn the procedures and functioning of the various department of a bank. In this process, learning about the instruments required for import and export financing by the banks plays a vital role. The Forex Department of Opera House branch mainly consists of two departments import & export these departments are explained in detail in the latter part of this project report. The import department is further divided into two sections. Forward contracts and Guarantee bring the same. Pre-shipment and post shipment are the section of exports department. This department has forward contracts also. This branch mainly deals with Diamond Trading. International finance is helpful for those who wish to seek import-export businesses. This project high the various bank operations done for international finance. The basic functioning of the banks and the use of various instruments for such banks remain the same regardless of the banks name or origin. For India to be a major player in world trade, an all encompassing, and comprehensive view needs to be taken for the overall development of the country‘s foreign trade. While increase in the exports is of vital importance we have also to facilitate those imports which are required to stimulate our economy. Coherence and consistency among trade and other economic policies is important for maximizing the contribution of such policies to development. Thus, while incorporating the existing practice of enunciating an annual EXIM policy, it is necessary to go much beyond and take an integral approach to the development requirements of India foreign trade. Thus we head for foreign trade policy
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Introduction To The Subject
FOREX (Foreign Exchange market) is an International foreign exchange market, where money is sold and bought freely. In its present condition FOREX was launched in the 1970s, when free exchange rates were introduced and only the participants of the market determine. The price of one currency against the other proceeding from supply and demand FOREX is a more objective market, because if some of its participants would like to change price, for some manipulative purpose .they would have to operate with tens of billions dollars, that is why any influence by a single participant in the market is practically out of the question. The superior liquidity allows the traders to open and /or close positions within a few seconds. The time of keeping a position is arbitrary and has no limits: from several seconds to many years. It depends only on your trading strategies. Although the daily fluctuations of currencies are rather insignificant, you may use the credit lines, which are accessible even to currency speculators with small capitals ($ 1000-5000), where the profit may be impressive. In FOREX, it‘s not obligatory to buy some currency first in order to sell it later; it‘s possible to open positions for buying and selling any currency without actually having it. Usually internet-brokers establish the minimum deposit such as $2000, for working in the FOREX market, and grant a leverage of 1:100.That is, opening the position at $100000, a trader invests $1000 and receives $99000 as a credit. The major currencies traded in FOREX, are Euro (EUR), Japanese yen (JPY), British Pound (GBP) and Swiss Franc (CHF). All of them are traded against the US dollar (USD).
The main merits of the FOREX market are: ? ? ? ? A two- way quotation is the unique feature of Forex. The biggest number of participants and the largest volumes of transactions. The market works 24 hours a day, every working days. A trader can open a position for any period of time he wants.
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DIAMOND INDUSTRY
India‘s diamond industry handles 80 per cent of the global polished diamond market, and earned $8 billion last year. India‘s diamond adventure took off in the 1970s when a small group of intrepid merchants, mostly Jains from Palanpur on the Gujarat-Rajasthan border, began invading the Belgian city of Antwerp, where 90 percent of the world‘s uncut diamonds were traded each year. First, they worked at the bottom end of the spectrum, taking up the smaller uncut diamonds. Next, they ?outsourced‘ the finishing jobs to India (where incidentally, the diamond industry employs more people than the IT industry), while working their way up the value chain. Growth of the diamond market in India is the highest in the world for Diamond Trading Company, a De Beers Group company, according to Cherie Tandon Saldanha, the company's marketing director for India. In volume terms, India is now the third largest market - accounting for 7 per cent of the company's total business - after the US (50 per cent) and Japan (13 per cent). "DTC accounts for 50 per cent of the diamond sale - both rough and finished - in the country and, keeping in mind the growth potential, 37 of our 92 sight holders globally are based in India." There are many well known brands like Asmi collection, Nakshatra brand, Asmi, Sangini, Arisia in India. Traditionally, India exports 11 of every 12 rough diamonds imported after finishing. The sector witnessed growth of 20 per cent in 2003 and 24 per cent in 2004. The diamond jewellery market in the country was valued at Rs 6,600 Crore (Rs 66 billion) in 2004, with diamonds constituting 70 per cent of the total value the highest globally.
Diamond Trading Corporation (DTC):
The Diamond Trading Company (DTC) is the rough diamond sales and distribution arm of the De Beers Family of Companies and is the world's largest supplier of rough diamonds. With activities in sales, sorting, valuing and diamond beneficiation, the DTC has representative offices in the UK and South Africa. The joint ventures DTC Botswana and Namibia DTC – 50:50 partnerships with the governments of Botswana and Namibia – sell diamonds to clients for cutting and polishing in those countries. Joint Ventures DTC Botswana and Namibia DTC – 50:50 partnerships with the governments of Botswana and Namibia – sell diamonds to clients for cutting and polishing in those countries.
Sorting and Valuation: The DTC‘s main sorting activities are broken down into production sorting and aggregation. No two diamonds are the same and production sorting is the classification of the various sizes, shapes, colours and clarities of rough diamond into one of around 12,000 categories used by the DTC. The sorting process ensures the correct valuation of all production. It also ensures that a consistent supply of diamonds can be delivered to the DTC‘s clients, who are among the world‘s leading diamantaires. Selling and Distribution: The Diamond Trading Company‘s (DTC) sales strategy is known as ?Supplier of Choice‘. It sought to build a more efficient channel for rough diamond distribution by the DTC and maintain ethical transparency amongst the DTC‘s client base
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?
The DTC goes beyond simply distributing rough; rather it aims to understand, in depth, the needs of our Sight holders clients, it enables Sight holders to gain maximum clarity and confidence about their supply delivery thereby helping to reduce the risk and volatility for their own businesses. The development of local marketing activity. The creation of thousands of jobs in the diamond industries of these nations, achieved through the establishment of producing country DTC operations in Botswana (DTCB), Namibia (NDTC) and South Africa (DTC SA)
?
Sights DTC customers physically inspect their allocations of rough diamonds before deciding whether or not to purchase them. Customers literally have ?Sight‘ of the diamonds, and this is why these selling periods are called ?Sights‘. The DTC does not sell rough diamonds other than at the Sights. Sight holders are carefully chosen by the DTC through the Supplier of Choice sales strategy for their ability to add value to the diamonds we sell, their expertise in particular rough diamonds and their financial and ethical integrity.
INDUSTRY VISIT PODDAR DIAMONDS Pvt LTD
Poddar Diamonds was established in 1988 by Anil Poddar, Umesh Poddar and Kantilal Poddar; where Mr. Anil Poddar handles purchase, marketing/sales and Mr. Umesh Poddar and Kantilal Poddar handle manufacturing activity. The main business of Poddar diamonds is Importing rough Diamonds, processing them and exporting the polished diamonds. It procures rough diamonds from RIO TINTO, Belgium and after processing these rough diamonds exports back to UAE, BELGIUM, HONG KONG, JAPAN, ITALY and SINGAPORE.
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Poddar Diamonds has factory in Dahisar, Mumbai and Ahmedabad in India.Intially it was partnership business but turned into a ltd. Company in the year 2006 after Monica and ShardaDevi entered into the business. Poddar Diamonds is well known for its brand SPARKLES in the market which is marketed at supermall in Tier I& Tier II cities (eg: Shoppers Stop)
Poddar Diamonds has a diamond factory in Dahisar, Nihar Jewels which was established in the year 1994 by Mr. Nihar Joshi in Salasar Estate, Dahisar. In the year 1994 Mr. Nihar Joshi had started this factory with 3 people i.e. designer, caster and setter with an investment of Rs.5 lakhs in the factory: Currently this factory posses an employee strength of about 165 in this unit. This factory in particulars is divided into 3 main departments Diamond Cutting, Diamond Polishing and Jewellery designing.
Jewellery Designing
Currently these unit posses 80 employees which work for about 12 hours per day. 90% of the worker are Bengali as Bengalis posses the art of Karigars. The process in this department goes as follows:
Designing on Paper
Approval by Client
Designing the Master
Molding and Cutting
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Casting
Actual Production
Quality Control
Designing on Paper:
The process starts with designing on paper manually by a group of designers, the ideas are generated through Brain Storming and by attending Fairs and Exhibitions, seminars.
Approval by Client:
These designs are further approved by Mr. Poddar or by client if the jeweler is a customized one.
Designing of Master:
After the approval by client a master piece of the same is designed in silver which is further duplicated by preparing the same in rubber. The designs are made in silver as the master is an asset for the company which has to be preserved and for further order the blueprint of the master or ris sent for gaining orders from the market, the master is in silver as silver is a cheaper than gold.
Molding and Cutting:
The master which is prepared in silver is further prepared on rubber dye which is further being used for preparing design in wax. The design which is prepared on rubber dye is done through machine called vulcanizer which helps in getting the imprint of the design on the dye. The rubber which is used is imported and costs about Rs750-800 /Kg as it lasts for about 8-10 years. The design which is made on wax is further used in casting process
Casting:
The design which is made on wax is further being placed in a mould machine which contains POP to get the design casted on POP , for this process the mould is further heated in an Oven at 800 ° C. After preparing design on POP the design is further used in Actual production
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Actual production:
In actual production the POP which is designed is further designed into Gold (10, 14, 18 Carats as per requirement of customer) which is being put into an automatic machine for melting and getting a shape of a tree which gives an outcome of about 12-15 rings which are further separated and filing is carried out.
Filing, setting and polishing:
Filing is done by workers through machine and other tool for removing the dirt and giving a finish touch to the jeweler and in the jewelry the diamond is set, for setting diamonds machines are used and if the diamonds are smaller in size i.e. in millimeter the diamonds are set using the microscopic technology. In a day, a normal machine can set about 100 diamonds appx., and a microscopic machine can set appx. 50-60 diamonds. After setting the diamond the polishing of the jewelry is carried out using brush of different sizes which helps in removing the dust particles and fingerprints.
Quality control:
Quality check is carried out as Poddar diamonds deals in branded range of products and if the jewelry is rejected then it is further recycled and being used again for making new design.
Diamond Cutting and Polishing Process
Diamond cutting is further divided into 2 units diamond cutting and diamond polishing. Diamond cutting is done by laser as per its properties it is hard in nature. In this process a rough diamond which is imported from RIO TINTO, Belgium is cut into pieces as per order and diamond size. The process goes as further.
Planning
Sairn Marking
Table smoothing
Bruting
Girdling
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Planning:
The company first imports rough diamonds from Belgium The planner must consider the size, clarity and crystal direction when deciding where to mark the diamond rough and then this rough diamond is further sent for Sairn marking process
Sairn Marking:
In this process the rough Diamond is cut into pieces with the help of laser, in this the maximum portion is taken to get more output.
Bruting:
In this process the diamond which is obtained out of rough is placed in between the rods and is rotated at a high speed to get a round outline so that it gets into shape.
Table Smoothing:
Table is the uppermost portion in the diamond and the diamond is placed in the holder and rubbed against the disk for creating a flat and smooth surface.
Bottom Block:
The lower part of the rough is brought into shape to create facets and girdling by setting the holder at various degrees to get a proper shape of the tip and the pavilion so that it gets a conical shape and can be set in the jewelry.
Regirdling:
Regirdling is done to get the cuts in the crown i.e. between the table and the girdle to get the cuts i.e. star shape facets and cuts at the crown.
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FAQs
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A) Why was the factory located at Dahisar? Answer: Mr. Nihar Joshi had brought this factory in 2000, Dahisar was not yet developed and the rates of property was very cheap and it was nearby Dahisar station so its easier for the worker class to travel. B) What was the main cost in his business?
Answer: The main cost in his business was the cost of Karigar and machines as he was totally dependent on them for further production. He was of the opinion that his employees are his Assets. Other cost like electricity cost, maintenance cost , license cost and taxes are secondary cost in every business, main cost is of employees as there were 165 employees currently working in his factory. C) What were the working hours in his factory? Answer: In his factory there were 3 units , Diamond cutting (35 Employees) which worked for 24 hours in 2 shifts of 12 hours each , Diamond Polishing (50 Employees) and Jewelry Department (80 employees) which worked for a shift of 12 hours. D) In machines, which would you prefer imported or Indian?
Answer: Mr. Nihar said that his unit had imported the casting machine worth Rs.12 lakhs from Japan as it is well known for its technology but if you are an SME then machines of Indian origin are equally well equipped with technology in comparison to imported one but machine of Indian origin is much cheaper than the imported ones and it may cost around 2-3 lakhs. E) Where do we get the machines of Indian Origin of good quality?
Answer: Bombay, Rajkot, Surat F) What is the profitability of your unit? Answer: Profitability in jewelry is 60-70%. Profitability in diamond is 15-20%
G) What is the process loss? Answer: The process loss in gold is 6% and there is no process loss in diamond .As the residue is been used in millimeter in jewelry which are exported and dust particle are used in table and bottom Smoothing and if there is any break down in machine and if the machine remains shut for 2-3 hours in a day then the factory incurs a heavy loss which runs into lakhs. H) What sanitation measures are been taken in the factory? Answer: Proper Drinking and health care measures are taken in the factory. the factory carpet is wiped in every 15 minutes with the vacuum cleaner as if the floor not cleaned then the unit may face loss as the dust particles found on the factory floor are mainly the gold particles which can be recycled and reused for making jewelry.
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I) What is the production of your company? Answer: The production of my company is 600 diamonds appx. per day and monthly its around 5000 pieces. J) If an individual wishes to start with a diamond business what would be the initial investment? Answer: Initial Investment would be around Rs.5 lakhs out of which 2-3 lakhs can be used in buying machines and the most important are the Karigar in this business. K) Which according to you is the most suitable location to set up a Diamond unit Mumbai or Gujarat? Answer: According to him Gujarat is the most suitable location as Gujarat government provides N number of facilities in Entrepreneurship development by providing huge subsidies in setting up a unit i.e. Electricity, licensing, water, export duties and tax benefits with cheapest labour cost: Comparatively Mumbai is more expensive as labour cost is more due to forming of Unions and setting up cost is also high and no subsidies are granted by the Maharashtra government.
WORKING CAPITAL
Working Capital are generally funds deployed for managing business operations which the diamond traders generally require for payment to labour, rent and Electricity. In Diamond Industry Labour or Karigars are of vital importance for any diamond merchant due to their skills and expertise which is required on work. Working Capital refers to that part of the firm‘s capital, which is required for financing short-term or current assets such as cash, marketable securities, debtors and inventories therefore funds thus invested in current assets keep revolving fast i.e. when traders first buy/import Raw Diamond from Diamond Trading Corporation and then process it and export it.
Factors Determining Working Capital: ? Total Costs incurred on materials, wages and overheads. Material is generally lenses, wax; chemicals POP which is required by the Diamond Traders in processing the rough Diamond into finished one. Wages for Karigars which are specialized skilled labours for this industry and Overheads are expenses which generally form the main part of operations ? The length of time for which raw materials remain in stores before they are issued to production, in case of Diamond Industry it is mainly 3 months. ? The length of the Production Cycle or Work-in-progress, i.e., the time taken for conversion of raw materials to finished goods, in this Industry it requires around 3-6 months as per orders ? The length of the Sales Cycle during which finished goods are to be kept waiting for sales.
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?
? ? ?
Finished Goods level = (Finished Goods as on 31st March * 12 months) / Total Cost of sales Total Cost of Sales means all manufacturing expenses + Opening stock of finished goods – Closing Stock of Finished Goods. Manufacturing Expenses include Raw materials consumed, Labour Charges and other direct expenses. The average period of credit allowed to customers/ debtors is 3 months but in this Industry we have viewed that the customers which purchased Diamond of smaller size (in MM) which are generally sold to overseas customer are on Credit basis as the risk involved is less whereas when a big size diamond or a Solitaire is sold its on Cash basis as the risk involved is more. The amount of cash required to pay day-to-day expenses of the business i.e. especially to worker who are on temporary basis which are generally less in this industry. The amount of cash required for advance payments, if any The average period of credit to be allowed by suppliers Sundry Creditors level = (Sundry Creditors as on 31st March*12 months) / Total purchases of Raw Materials and Finished Goods
Financing of working capital had always been an exclusive domain of commercial banks. With the nationalisation of the banks an entirely new breed of entrepreneurs made a demand on bank credit. Small sector and other segments of priority sector were to be the major beneficiary of nationalisation and were preferred claimants of credit. This resulted in an unexpected demand on lendable funds of banks and naturally called for a reform in the policies of banks to orient them to the new developmental role assigned to the banking industry. Another important factor which called for reforms was the inbuilt weakness in the cash credit system linked with emphasis on security. The limits were directly fixed on the basis of security available in the account which in many cases resulted in double finance. In view of such a situation obtaining at that time, Reserve Bank of India constituted a 'Study Group' with Shri Prakash Tandon as Chairman in July, 1974 to frame necessary guidelines on bank credit
Working capital Requirement is assessed in two ways
1. Tandon Committee Report 2. Turnover Method
Tandon Committee Method: This method is used when the working capital limit is more than 5 Crore and exceptionally applied for below 5 Crores depending on higher credit need from borrower. 'Tandon Group' suggested norms for 15 different kind of industries covering a major part of all industries in the country and the norms related to ? ? ? ? Raw materials Stocks in process/semi finished goods Finished goods Receivables
Which together make for bulk of the current assets of any unit. As per Reserve Bank of India, the banks have been given discretion to decide the levels of holding of individual items of inventory and of receivables, which should be supported by bank finance after taking into account the
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production/processing cycle of an industry as also other relevant factors. Reserve Bank will not prescribe detailed norms for each item of inventory as also of receivables; but only advise the overall levels of inventory and receivables for different industries for the guidance of the banks to serve as broad indicators. The other factors will include the financial parameters of the borrower. However the relaxatation is permitted by the banks depending on past track record of the company. The trade creditors‘ level is accepted by banks generally depending on the normal practice in industry/past record of the company. Thereafter the working capital is assessed by the banks by the following computation.
A) Total Current Assets a. Total Current asset Excluding Exports receivables B) Other Current Liabilities C) Working Capital Gap (A-B) D) Minimum Stipulated net working Capital (25% of A) E) Actual/projected net working capital F) C-D G) C-E H) Maximum permissible bank finance (MPBF) (lower of F & G) I) Excess borrowing if any. (when current ratio is less than 1.33) For doing above exercise bank will need audit stock, provisional balance sheet and Profit & loss A/c for last year and CMA showing estimated and projections for Current financial and next financial year. CMA is verified by banks and if estimates are not acceptable banks may revise it keeping in view the acceptable levels of inventory, receivables and trade creditors. Bank analyses the CMA, audited balance sheet and profit & loss A/c for last year and completes the assessment as per tandon‘s method (2) as above.
T
he Industry margi n of 25% under both the Diamond Exporter metho 1. DTC Sight 3.50 1.00 3.00 7.50 ds is Holders the 1. Non-DTC Sight 3.00 1.00 3.00 7.00 mini Holders mum requirement to ensure a minimum of current ratio of 1.33. If a borrower has more liquid surplus, the MPBF will be reduced accordingly. To illustrate this point let us consider the following example Total current assets Total current liabilities excluding bank borrowings Net working capital 1000 200 800
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Raw Materials including stores and other items used in the process of manufacture) (Months’ consumption)
Finished Receivables Overall Goods (Month’s levels (Months’ Sales) (Months) Cost of Sales)
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MPBF under method II will be calculated as under: Particulars Total current assets Total current liabilities excluding bank borrowings Working capital gap Minimum margin of 25% of total current assets Actual net working capital iii - iv iii- v MPBF (Minimum of vi or vii) Excess bank borrowing Amount 1000 200 800 250 300 550 500 500 0
The Tandon committee further suggested that banks should endeavour to grant credit facilities to the purchasers as far as possible and seller should be paid immediately after sale. This type of financing can also be arranged through the medium of bills and is popularly known as 'Drawee Bill Scheme‘. The seller will be paid immediately on presentation of the bill and the liability against these bills will be on account of the buyer as part of his working capital limits. On due date the bills will be paid to the bank by the buyer Estimates for the ensuing quarter: It gives the level of current assets and current liabilities as are estimated for the ensuing quarter on the basis of which operating limits will be fixed by the banks. Performance during the previous quarter: This statement is to be submitted within 6 weeks from the close of the quarter to which the statement relates. By making comparisons between the above statements the quality of credit planning by the borrower and his efficiency to translate his plans into actual production can be effectively ascertained. 'Peak Level' and 'Normal Nonpeak Level' Limits Separate appraisal and fixation of credit limits for 'peak level' and normal 'non-peak level' must be necessary and the periods during which the separate limits will be in operation must also be specified. Adhoc or Temporary Limits Bank have now been given full discretion to sanction ad hoc facilities based on commercial judgement and merits of individual case. The rate of interest and others terms and conditions including period of ad hoc/temporary limits will be as per the discretion of concerned bank.
Diversion of working capital finance The funds lent by the banks against working capital limits are required to be utilised for meeting genuine working capital needs of the borrowers and cannot be allowed to he diverted for other purpose such as investment in finance companies, associate companies/subsidiaries, inter co- operate deposits etc.
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CMA data is a tool used by the bankers to assess the requirement of working capital. It is divided into six parts as follows: Form I: Particulars of existing |& Proposed limits. Form II: Operating Statement Form III: Analysis of Balance sheet Form IV: Comparative statement of Current Assets and Current Liabilities Form V: Computation of Maximum Permissible Bank Finance (MPBF) Form VI: Funds Flow Statement
Turnover Method: This method is used when the working capital limit is less than 5 Crore. Under this method 20% of estimated sales is provided as the working capital by the banks. In actual when the NWC with the borrower is less than the minimum required then limit in that case may be released in phases depending upon accumulation of profit during the current year so that necessary margin is available with the borrower. This method is generally referred to as 'Turnover Method'. If the borrower needs higher limits than assessed as per turnover method, the bank will be required to assess the working capital requirements by conventional method. The higher of the two limits (which is also known as maximum permissible bank finance, which excludes deemed exports) may be allowed to the borrower and actual disbursement will be regulated through availability of drawing power in the account. For SSIs the limit has been increased from 2 Crores to 5 Crores.
LC Rating (Large Corporate Rating): While granting finance to any of the companies, banks take into account the LC ratings of the companies which are also given by some other institutions (like CRISIL, ICRA, CARE) if the industry/sector differs, these institutions take into the account the growth of the sector and the financials of the company (of last 3 years for reference)and the project copy for which they need finance currently. By judging the financial parameters and the know-how of the industry, finance is granted to the companies according to their limits and LC ratings of their company. These LCs are crated on the basis of latest audited balance sheet of the company.
LC LC1, LC2 LC3, LC4 LC5, LC6 Below LC6
Rating AAA AA A B
Remark Excellent Good Satisfactory Worse
If the rating is LC1-LC4 then it generally suggest that the credibility of that company is really very good but when a company receives LC5 then banks may think of possessing more of collateral due incurring of higher risk while financing, when the LC rating is below LC6 banks do not finance . Amount to be granted for loan is on the basis of sales. Generally banks finance up to 50% of sales .If a company‘s LC rating is LC6 then banks may enter into consortium.
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The banks may enter into consortium when the rating is satisfactory or the amount to be financed is too high. For the purpose of consortium, RBI allows minimum 2 banks and maximum 15 banks to enter into consortium in order to bear the risk on the pro-rata basis. In a consortium, the bank which provides the highest share is the LEAD bank and rest of them are the member banks .The Lead bank in the consortium has decisions making right and the member banks have to stay abide by the decisions of lead bank. In case of default all the proceedings like filing a suit against the exporter and follow-up and documentation is to be carried out by the lead bank. All the member in a consortium meet every Quarterly in order to discuss the major issues and problems faced by them in financing. In case of default, the collateral which is auctioned is shared on the basis of their share in the consortium. The finance which is provided is of two types fund based and non fund based. In fund based limit the finance provided is generally in INR and in Non-Fund basis the finance provided is in the form of Letter of credit and Bank Guarantees. In many cases advance against Equity share capital is also provided if a company proposes to issue Equity Share capital.
Working Capital Requirement
Fund Based
Non- Fund Based
Pre-Shipment Finance
PostShipment Finance
Letter of Credit
Bank Guarantees
Fixation of Limit: The limits are fixed by the bank within the overall sanctioned limits on the basis of audited balance sheet and provisional balance sheet of the current year submitted by the exporter. This statement will form the basis of quarterly review of the account and fixing of operative limits. The projection which are provided by the bank are on the basis of past trends and in order to check the reliability of the account the clients are requested to submit the stock statement to the bank every month. Any excess/under utilisation of operative limit beyond the level is taken as an irregularity revealing defective planning by the exporter and some corrective measures are taken by the banks in order to avoid recurrence of such irregularities in future. Bank has made it compulsory for all exporters enjoying working capital credit limits of Rs.100 lacs and above to submit the quarterly operating statements before the commencement of the quarter. If a borrower does not submit these statements within the prescribed time limits, the bank charges to the client penalty interest of one per cent per annum on the total outstanding for the period of default in submission of statements.
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The penalty is followed by a notice to the client/exporter to freeze the account if the default persists. Even in consortium accounts, the operations in cash credit accounts of the exporter may be frozen. If the quarterly operative returns are not submitted. No additional limits will be sanctioned to such defaulting borrowers. Export Finance: The main core business of the Branch in Opera House is to Finance Diamond Exporter. These exporters require finance for Import of Rough Diamonds which is generally available in UAE, BELGIUM, HONG KONG, JAPAN, ITALY and SINGAPORE. After acquiring the rough from the mines they are processed and then they are exported to USA, Hongkong etc.
The export finance which is granted by bank is of two types: 1) Pre-shipment finance/Packing Credit. 2) Post-shipment finance.
Pre Shipment Finance/ Export Packing Credit (EPC):
Pre-shipment is also referred as ?packing credit?. It is working capital finance provided by commercial banks to the exporter prior to shipment of goods. The finance required to meet various expenses before shipment of goods i.e. procurement of raw material, payment to labour/Karigars, processing of rough diamond into finished diamond. This finance is generally given for a time lag of 180-270 days. The finance which is provided against the export order. The bank finances upto 90% in INR and if required in foreign currency 100% of loan is granted. . Importance of Pre-Shipment Finance: ? To purchase raw material like Rough Diamond which is generally imported or purchased from the Diamond Trading Corporation or Gold for fixing the diamond into gold studded jewelry which is also imported from mines and brought from canalized agencies like Mineral and Metal Trading Corporation or from State Trading Corporation . Many of the Exporter buy in bulk from the bank which have authorized agency as per RBI guidelines, banks like Bank of India, HDFC, ICICI and Union Bank of India have the authority to sell gold to the diamond traders. ? ? To assemble the goods in the case of merchant exporters/ members of DTC which are also known as sight holders. They assemble goods like Rough Diamonds, Gold, Machines, Microscope, Vulcanizer and other Chemicals, brush required for polishing etc. To store the finished goods as these goods are in anticipation in demand as these are luxurious goods and they are to be stored till they are sent through Air Route.
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? ? ?
To pay for packing, marking and labeling of goods. To import or purchase from the domestic market heavy machinery and other Capital goods to produce export goods. Mainly the machineries required are laser machines which are required for diamond cutting and brutting. To pay for export documentation expenses i.e. for lodging of bill i.e. 0.16% , Minimum Charged is Rs.650 and maximum Rs.7500.
Forms of Pre-Shipment Finance: A) Export Packing Credit: 1. Cash Packing Credit Loan: In this type of credit, the bank normally grants packing credit advantage initially on unsecured basis. Subsequently, the bank may ask for security. 2. Advance against Hypothecation: Packing credit is given to process the goods for export. The advance is given against security and the security remains in the possession of the exporter. The exporter is required to execute the hypothecation deed in favour of the bank. In hypothecation, the diamond traders generally give office premises and raw material as collateral security 3. Advance Against Pledge : The bank provides packing credit against security. The security remains in the possession of the bank. On collection of export proceeds, the bank makes necessary entries in the packing credit account of the exporter. In pledge, diamond trader generally keeps Bharat Diamond Bourse (BDB) as collateral security. Bharat Diamond Bourse (BDB): Bharat Diamond Bourse is a bourse especially meant for Diamond traders in order to shift their business from Panchratna to BDB which is in Bandra Kurla Complex. Most of the Diamond merchant traders have shifted there as these traders have formed a union to form a International HUB for Jewelry and Diamond Industry in India. Most of the banks and other allied activities which are required to run a business will be available under one roof Disbursement of Packing Credit: After proper sanctioning of credit limits which is done in credit Department, the bank ensures that a) To complete proper documentation and compliance of the terms of sanction i.e. Creation of mortgage etc. b) There should be an Export Order / Bill of Exchange / Copy of Invoice produced by the exporter on the basis of which disbursements are normally allowed.
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In both the cases following particulars are to be verified: i. Name of the Buyer. ii. Commodity to be exported. iii. Quantity. iv. Value. v. Date of Shipment / Negotiation. vi. Authorization by the customs. vii. Any other terms to be complied with.
B) Packing Credit Foreign Currency (PCFC): ? ? ? ? The PCFC is granted to the exporter by the commercial banks in foreign Currency in order to make the payment for import of Rough Diamond. It is an additional window to rupee packing credit scheme & available to cover both the domestic i.e. indigenous & imported inputs. The exporter has two options to avail him of export finance. To avail him of pre-shipment credit in rupees & then the post shipment credit either in rupees or in foreign currency denominated credit or discounting/ rediscounting of export bills. PCFC can also be given for ?deemed exports? for purchase of supplies. This finance should be liquidated within a maximum period of 30 days.
Eligibility: PCFC is extended only on the basis of confirmed /firms export orders. However, the facility of the liquidation of packing credit under the first in first out method will be allowed. Order: Banks insist on submission of export order for every disbursement of pre-shipment credit from exporters. Generally as soon as the Export Payment is realized the EPC/PCFC is liquidated first and then the balance is credited to the Current Account.
Post Shipment Finance: Post Shipment Finance is a kind of loan provided by a financial institution to an exporter after export has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds Basic Features The features of post shipment finance are:
?
?
Purpose of Finance: Post shipment finance is meant to finance export sales receivable after the date of shipment of goods to the date of realization of exports proceeds. In cases of deemed exports, it is extended to finance receivable against supplies made to designated agencies and as the payment is made it is considered as Outward Remittance (ORTT). Basis of Finance Post shipment finances is provided against Export Bill of goods or supplies made to the importer or any other designated agency. Post shipment finance can be secured or unsecured. Since the finance is extended against evidence of export shipment and bank obtains the documents of title of goods, the finance is normally self
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liquidating. Further, the finance is mostly a funded advance. In few cases, such as financing of project exports, the issue of guarantee (retention money guarantees) is involved and the financing is not funded in nature. This kind of Guarantee is also known as bank guarantee or Bank Certificate and the main objective for issue of this certificate was that the export has taken place which helps in renewing or avoiding cancellation of Export license.
Quantum of Finance: As a quantum of finance, post shipment finance can be extended up to 100% of the invoice value of goods. In special cases, where the domestic value of the goods increases the value of the exporter order, finance for a price difference can also be extended and the price difference is covered by the government. This type of finance is not extended in case of pre-shipment stage. Banks can also finance undrawn balance. In such cases banks are free to stipulate margin requirements as per their usual lending norm. Period of Finance Post shipment finance can be off short terms or long term, depending on the payment terms offered by the exporter to the overseas importer. In case of cash exports, the maximum period allowed for realization of exports proceeds is six months from the date of shipment. Concessive rate of interest is available for a highest period of 180 days, opening from the date of surrender of documents. Usually, the documents need to be submitted within 21days from the date of shipment.
Types of Post Shipment Finance: The post shipment finance can be classified as: 1. Export Bills purchased/discounted/ negotiated. 2. Advance against export bills sent on collection basis. 3. Advance against export on consignment basis
1. Export Bills Purchased/ Discounted. (DP & DA Bills): An export bill is used in terms of sale contract/ order may be discounted or purchased by the banks. It is used in indisputable international trade transactions and the proper limit has to be sanctioned to the exporter for purchase of export bill facility. It includes a grace period 25 days which is generally granted to the exporter in order to send all the copies of the bill to the importer. It also includes acceptance of draft in favour of the Drawee of the bill.
2. Advance against Export on Consignments Basis: Bank may choose to finance when the goods are exported on consignment basis at the risk of the exporter for sale and eventual payment of sale proceeds to him by the consignee. However, in this case bank instructs the overseas bank to deliver the document only against trust receipt
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/undertaking to deliver the sale proceeds by specified date, which should be within the prescribed date even if according to the practice in certain trades a bill for part of the estimated value is drawn in advance against the exports. 3. Cash on delivery basis or on the basis of sight: Banks also choose to finance on cash on delivery basis where in the bill period is only of 25 days. The payment is made only on submitting the export documents to the bank. It is generally included when it is a bank through payment.
Calculation of the bills:
Company XYZ. Shipment Date 15-12-2009 13-06-2009 Tenor of Bill days 180
Initiall y in order to Today 23-12-2009 Subvention Rate 7.25% boost the exports of the No. of Days from shipment Interest Rate 180 Days 9.25% 120 nation Day from today 172 Interest Rate >180 Days 15.25% Government had come up No of days up to 31-03-2010 99 Interest Amount 610630 with a policy Amount after interest 15389370 of Interest Rate Subvention which will act as an Incentive for the exporters. The interest which was charged initially was 9.25% within the time lag of 180 days and subvention was in validation upto 31 st March 2010. Above mentioned specimen of Company XYZ shows the effect of interest rate subvention i.e as shown in the bill that the tenor of the bill is 180 days from the date of shipment i.e. from 15th December to 13th June (6 months). As the interest subvention is upto 31st March so the number of days left are 99 days for which the subvention is valid and for the rest of the days 9.25% will be charged.
Notional Due Date Amount purchase 16000000
After the Notional Due date 15.25% is charged till the date of realization of the bill. 16000000*7.25*99 100*365 + 16000000*9.25*(172-99) 100* 365 = 314630+296000 = 610630.
So the Amount to be credited to the account is 16000000-610630 i.e. Rs.153839370.
Company PQR Shipment Date Notional Due Date Today No of Days from shipment From today Concession Rate upto 03-06-2010 28-06-2010 07-06-10 25 21 180 Tenor of Bill days Amount Purchase Interest Rate 180 days Interest Rate >180 days Interest amount Amount after interest 25 3520000 9.25% 15.25% 18733 3501267
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The Notional Due Date of the bill is the tenor of the bill plus the date of shipment. The date of Shipment is 3rd June 2010. The tenor of the bill given is 25 days as it is Cash on Delivery and as the shipment date is after 31st march 2010 so Interest Rate subvention is not applicable. So Calculation is 3520000*9.25*25 = Rs.22301 365*100 So the amount to be credited in the client‘s account is Rs.3520000 – Rs. 22301 i.e. Rs.3501267.
Documentation Required for Export Finance.
Introduction
International market involves various types of trade documents that need to be produced while making transactions. Each trade document is different from the other and presents the various aspects of the trade like description, quality, number, transportation medium, indemnity, inspection and so on. So, it becomes important for the importers and exporters to make sure that their documents support the guidelines as per international trade transactions. A small mistake could prove costly for any of the parties. For example, a trade document about the bill of lading is a proof that goods have been shipped on board, while Inspection Certificate certifies that the goods have been inspected and meet quality standards. So, depending on these necessary documents, an exporter can assure an importer that he has fulfilled his responsibility whilst the importer is assured of his request being carried out by the exporter. The following is a list of documents often used in international trade:
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? ? ? ? ? ? ?
Air Waybill Draft (or Bill of Exchange) Insurance Policy (or Certificate) GR form Bill of Entry Packing List/Specification Inspection Certificate
Air Waybills: Air Waybills is generally issued by the logistic company and it acts as a proof that the goods have been received for the purpose of export by air. It is nor a document of title of goods neither a negotiable document because it is merely an acknowledgement of goods. If an agent fails to pay the freight on the airway bill, the carriers will have the right over the goods and the holder of the bill will not get his goods. A typical air waybill sample consists of three originals and nine copies. The first original is for the carrier and is signed by an export agent; the second original, the consignee's copy, is signed by an export agent; the third original is signed by the carrier and is handed to the export agent as a receipt for the goods.
Air Waybills serves as: . • A certificate of insurance. • A guide to airline staff for the handling, dispatch and delivery of the consignment.
The air waybill contains details like:
? ? ? ? ? ?
The proper shipper and consignee must be mention. The airport of departure and destination must be mention. The goods description must be consistent with that shown on other documents. Any weight, measure or shipping marks must agree with those shown on other documents. It must be signed and dated by the actual carrier or by the named agent of a named carrier. It must mention whether freight has been paid or will be paid at the destination point.
Commercial Invoice: Commercial Invoice document is provided by the exporter to the importer. It is also known as export invoice or import invoice or a document of content as it contains all the information required for preparation of all other document, commercial invoice is finally used by the custom authorities of the importer's country to evaluate the good for the purpose of taxation. The invoice must
? ?
Be issued by the beneficiary named in the credit (the seller). Be address to the applicant of the credit (the buyer).
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? ? ? ? ? ?
Be signed by the beneficiary (if required). Include the description of the goods exactly as detailed in the credit. Be issued in the stated number of originals (which must be marked "Original) and copies. Include the price and unit prices if appropriate. State the price amount payable which must not exceed that stated in the credit Include the shipping terms.
Bill of Exchange: A Bill of Exchange is a special type of written document under which an exporter ask importer a certain amount of money in future and the importer also agrees to pay the importer that amount of money on or before the future date. This document has special importance in wholesale trade where large amount of money involved.
Following persons are involved in a bill of exchange: Drawer: The person who writes or prepares the bill. Drawee: The person who pays the bill. Payee: The person to whom the payment is to be made. Holder of the Bill: The person who is in possession of the bill.
On the basis of the due date there are two types of bill of exchange:
? ?
Bill of Exchange after Date: In this case the due date is counted from the date of drawing and is also called bill after date. Bill of Exchange after Sight: In this case the due date is counted from the date of acceptance of the bill and is also called bill of exchange after sight.
Insurance Certificate Also known as Insurance Policy, it certifies that goods transported have been insured under an open policy and is not actionable with little details about the risk covered. It is necessary that the date on which the insurance becomes effective is same or earlier than the date of issuance of the transport documents. Also, if submitted under a LC, the insured amount must be in the same currency as the credit and usually for the bill amount plus 10 per cent. The requirements for completion of an insurance policy are as follow:
? ? ? ? ? ? ? ? ?
The name of the party in the favor which the document has been issued. The name of the vessel or flight details. The place from where insurance is to commerce typically the sellers warehouse or the port of loading and the place where insurance cases usually the buyer's warehouse or the port of destination. Insurance value that specified in the credit. Marks and numbers to agree with those on other documents. The description of the goods, which must be consistent with that in the credit and on the invoice. The name and address of the claims settling agent together with the place where claims are payable. Countersigned where necessary. Date of issue to be no later than the date of transport documents unless cover is shown to be effective prior to that date.
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Export Declaration form/GR form: As per Indian Exchange Control regulations details of all goods exported from India are required to be declared on certain specified forms. These forms are evolved by RBI to ensure the value of goods exported from India. The form designed is so that they can have an effective check over the cycle of movement of goods and receipt of their value into foreign exchange into India. They are also known as GR forms they are submitted in duplicate to the customer or exporter, initially it was submitted to RBI every fortnight but due to ample amount of documentation involved in the process, RBI came up with process of submitting Supplementary R-Return which is a computerized form in involves defining of a purpose in it. 202 –Bank to bank 103- Bank to the customer These are some of the purpose which need to be defined on the R-Return and if any error occurs from the point of view of authorized dealer then the purposes are rectified accordingly. Export Credit Guarantee Corporation of India Limited (ECGC): ? ? ? ? ? ? Provides credit risk covers to Exporters against nonpayment risks of the overseas buyers / buyer‘s country in respect of the exports made. Provides credit Insurance covers to banks against lending risks of exporters Assessment of buyers for the purpose of underwriting Preparation of country reports. International experience to enhance Indian capabilities An ISO organisation excelling in credit insurance
Risks Covered Risk covered is of two types i.e. Commercial Risk and Political Risk. Commercial Risk: ? Insolvency of buyer/LC opening bank ? Protracted Default of buyer ? Repudiation by buyer
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Political Risk: ? ? ? ? War/civil war/revolutions Import restrictions Exchange transfer delay/embargo Any other cause attributable to importing
Specific Buyer wise Policy: ? ? ? ? ? ? ? ? Covering One buyer / One Bank Processing fee Rs.1000/Period of cover - One year All shipments to buyer on Non LC terms or shipments under LC from bank covered Quarterly/Annual premium payable upfront based on projected exports 80% cover Monthly or quarterly shipment statements 5% No Claim Bonus reduction on renewal
Multi buyer exposure policy: ? ? ? ? ? ? ? ? ? ? ? Cover on exposure as opposed to turnover and cover for more than 1 buyer Discretion to choose buyers for cover with exporter and shall be acceptable to ECGC Processing Fee Rs.5000/- to accompany application List of buyers to be given with proposal and any addition to be advised Minimum 10% of projected turnover will be fixed as Aggregate Loss Limit (ALL) which will be the Maximum Liability Exporter can opt for higher exposure than 10% of turnover Cover for each buyer is 10% of ALL as Single Loss Limit (SLL) Exporter to have access to ECGC website for checking defaulter buyer list. Coverage is 80% and lower cover available with proportionate reduction of premium. Single premium rate irrespective of country grading Upfront premium payable before issue or in quarterly installments 5% No Claim Bonus reduction on renewal.
Export Credit Insurance Covers to Banks: ? Covers for working capital granted by commercial banks to Exporters at Pre-shipment and Post shipment stages ? Covers available on exporter wise, bank branch wise and bank wise ? Losses due to protracted default/Insolvency of exporters covered ? Cover varies from 60% to 95% depending on the type of cover
Payments Collection Methods in Export Import International Trade.
Introduction:
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Payment Collection Against Bills also known documentary collection; Is a payment method used in international trade all over the world by the exporter for the handling of documents to the buyer's bank and also gives the banks necessary instructions indicating when and on what conditions these documents can be released to the importer. Collection against Bills is published by International Chambers of Commerce (ICC), Paris, France. The last updated issue of its rule was published on January 1, 1966 and is known as the URC 522. It is different from the letters of credit, in the sense that the bank only acts as a medium for the transfer of documents but does not make any payment guarantee. However, collection of documents is subjected to the Uniform Rules for Collections published by the International Chamber of Commerce (ICC).
Role of Various Parties: Exporter The seller ships the goods and then hands over the document related to the goods to their banks with the instruction on how and when the buyer would pay. Exporter's Bank The exporter's bank is known as the remitting bank, and they remit the bill for collection with proper instructions. The role of the remitting bank is to:
? ? ?
Check that the documents for consistency. Send the documents to a bank in the buyer's country with instructions on collecting payment. Pay the exporter when it receives payments from the collecting bank.
Buyer/Importer The buyer / importer is the drawee of the Bill. The role of the importer is to:
? ?
Pay the bill as mention in the agreement (or promise to pay later). Take the shipping documents (unless it is a clean bill) and clear the goods.
Importer's Bank This is a bank in the importer's country; usually a branch or correspondent bank of the remitting bank any other bank can also be used on the request of exporter.
but
The collecting bank acts as a remitting bank's agent and clearly follows the instructions on the remitting bank's covering schedule. However the collecting bank does not guarantee payment of the bills except in very unusual circumstance for undoubted customer, which is called availing. Importer's bank is known as the collecting / presenting bank. The role of the collecting banks is to :
? ?
Act as the remitting bank's agent Present the bill to the buyer for payment or acceptance.
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? ?
Release the documents to the buyer when the exporter's instructions have been followed. Remit the proceeds of the bill according to the Remitting Bank's schedule instructions.
If the bill is unpaid / unaccepted, the collecting bank:
? ? ? ?
May arrange storage and insurance for the goods as per remitting bank instructions on the schedule. Protests on behalf of the remitting bank (if the Remitting Bank's schedule states Protest) Requests further instruction from the remitting bank, if there is a problem that is not covered by the instructions in the schedule. Once payment is received from the importer, the collecting bank remits the proceeds promptly to the remitting bank less its charges.
Documents Against Payments (D/P) This is sometimes also referred as Cash against Documents/Cash on Delivery. In effect D/P means payable at sight (on demand). The collecting bank hands over the shipping documents including the document of title (bill of lading) only when the importer has paid the bill. The Drawee is usually expected to pay within 3 working days of presentation. The attached instructions to the shipping documents would show "Release Documents Against Payment"
Risks: Under D/P terms the exporter keeps control of the goods (through the banks) until the importer pays. If the importer refuses to pay, the exporter can:
? ?
Protest the bill and take him to court (may be expensive and difficult to control from another country). Find another buyer or arrange a sale by an auction.
With the last two choices, the price obtained may be lower but probably still better than shipping the goods back, sometimes; the exporter will have a contact or agent in the importer's country that can help with any arrangements. In such a situation, an agent is often referred to as a Case of Need, means someone who can be contacted in case of need by the collecting bank. If the importer refuses to pay, the collecting bank can act on the exporter's instructions shown in the Remitting Bank schedule. These instructions may include:
? ?
Removal of the goods from the port to a warehouse and insure them. . Protesting the bill through the bank's lawyer.
Documents against Acceptance (D/A)
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Under Documents against Acceptance, the Exporter allows credit to Importer, the period of credit is referred to as Usance. The importer/drawee is required to accept the bill to make a signed promise to pay the bill at a set date in the future. When he has signed the bill in acceptance, he can take the documents and clear his goods. The payment date is calculated from the term of the bill, which is usually a multiple of 30 days and start either from sight or form the date of shipment, whichever is stated on the bill of exchange. The attached instruction would show "Release Documents Against Acceptance". Risk: Under D/A terms the importer can inspect the documents and ,if he is satisfied, accept the bill for payment o the due date, take the documents and clear the goods the exporter loses control of them.
The exporter runs various risks. The importer might refuse to pay on the due date because :
? ? ? ? ?
He finds that the goods are not what he ordered. He has not been able to sell the goods. He is prepared to cheat the exporter (In cases the exporter can protest the bill and take the importer to court but this can be expensive). The importer might have gone bankrupt, in which case the exporter will probably never get his money.
Usance D/P Bills A Usance D/P Bill is an agreement where the buyer accepts the bill payable at a specified date in future but does not receive the documents until he has actually paid for them. The reason is that airmailed documents may arrive much earlier than the goods shipped by sea. The buyer is not responsible to pay the bill before its due date, but he may want to do so, if the ship arrives before that date. This mode of payments is less usual, but offers more settlement possibility. These are still D/P terms so there is no extra risk to the exporter or his bank. As an alternative the covering scheduled may simply allow acceptance or payments to be deferred awaiting arrival of carrying vessel. There are different types of Usance D/P bills, some of which do not require acceptance specially those drawn payable at a fix period after date or drawn payable at a fixed date. Bills requiring acceptance are those drawn at a fix period after sight, which is necessary to establish the maturity date. If there are problems regarding storage of goods under a Usance D/P bill, the collecting bank should notify the remitting bank without delay for instructions.
Guidelines from FEDAI:
Foreign Exchange Dealers Association of India (FEDAI) was established in 1958 under the Section 25 of the Companies Act (1956). It is an association of banks that deals in Indian foreign exchange and work in coordination with the Reserve Bank of India, other organizations like FIMMDA, the Forex Association of India and various market participants. It has an advantage over that of the authorized dealers who are now allowed by the RBI to issue stand by letter of credits towards import of goods. As the issuance of standby of letter of Credit including imports of goods is susceptible to some risk in the absence of evidence of shipment, therefore the importer should be advised that documentary credit under UCP 500/600 should be the preferred route for importers of goods.
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Main Role of FEDAI is as follows: 1. Formulating uniform rules and Guidelines for authorized dealers ensuring a level playing field for the participants and harmonizing the interest of Authorised Dealers and Customers. 2. Associating itself with RBI in promoting growth in India‘s Export and Import trade. 3. Granting authorization to brokers and monitoring the broking activity in Forex market. 4. Providing guidance and information to members in foreign exchange business. 5. To work with member banks to identify the industry‘s key priorities and targets. 6. To contribute to the development of the foreign exchange market- its efficiency, depth and liquidity. 7. To promote best practices for efficient conduct of business including development and maintenance of derivatives and their documentation. 8. To set up a machinery for swift resolution of disputes amongst member banks and their customer. 9. To undertake studies of new exotic products that is sprouting in the international markets and to create conditions for introducing them in the Indian market. 10. To help the member banks for adapting to various products offered in the market. 11. To bring out a periodical Review/Journal on forex related matters.
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OVERVIEW OF INDIAN CURRENCY MARKET
During the early 1990s, India embarked on a series of structural reforms in the foreign exchange market. The exchange rate regime, that was earlier pegged, was partially floated in March 1992 and fully floated in March 1993. The unification of the exchange rate was instrumental in developing a market-determined exchange rate of the rupee and was an important step in the progress towards total current account convertibility, which was achieved in August 1994. Although liberalization helped the Indian Forex market in various ways, it led to extensive fluctuations of exchange rate. This issue has attracted a great deal of concern from policymakers and investors. While some flexibility in foreign exchange markets and exchange rate determination is desirable, excessive volatility can have an adverse impact on price discovery, export performance, sustainability of current account balance, and balance sheets. In the context of upgrading Indian foreign exchange market to international standards, a well developed foreign exchange derivative market (both OTC as well as Exchange-traded) is imperative. With a view to enable entities to manage volatility in the currency market, RBI on April 20, 2007 issued comprehensive guidelines on the usage of foreign currency forwards, swaps and options in the OTC market. At the same time, RBI also set up an Internal Working Group to explore the advantages of introducing currency futures. The Report of the Internal Working Group of RBI submitted in April 2008, recommended the introduction of Exchange Traded Currency Futures. Subsequently, RBI and SEBI jointly constituted a Standing Technical Committee to analyze the Currency Forward and Future market around the world and lay down the guidelines to introduce Exchange Traded Currency Futures in the Indian market. The Committee submitted its report on May 29, 2008. Further RBI and SEBI also issued circulars in this regard on August 06, 2008. Currently, India is a USD 34 billion OTC market, where all the major currencies like USD, EURO, YEN, Pound, Swiss Franc etc. are traded. With the help of electronic trading and efficient risk management systems, Exchange Traded Currency Futures will bring in more transparency and efficiency in price discovery, eliminate counterparty credit risk, provide access to all types of market participants, offer standardized products and provide transparent trading platform. Banks are also allowed to become members of this segment on the Exchange, thereby providing them with a new opportunity. Source :-( Report of the RBI-SEBI standing technical committee on exchange traded currency futures) 2008.
CURRENCY DERIVATIVE PRODUCTS
Derivative contracts have several variants. The most common variants are forwards, futures, options and swaps. We take a brief look at various derivatives contracts that have come to be used.
? Spot
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A spot transaction is a two-day delivery transaction (except in the case of trades between the US Dollar, Canadian Dollar, Turkish Lira and Russian Ruble, which settle the next business day), 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.
? FORWARD: The basic objective of a forward market in any underlying asset is to fix a price for a contract to be carried through on the future agreed date and is intended to free both the purchaser and the seller from any risk of loss which might incur due to fluctuations in the price of underlying asset.
A forward contract is customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price. The exchange rate is fixed at the time the contract is entered into. This is known as forward exchange rate or simply forward rate.
? FUTURE: A currency futures contract provides a simultaneous right and obligation to buy and sell a particular currency at a specified future date, a specified price and a standard quantity. In another word, a future contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Future contracts are special types of forward contracts in the sense that they are standardized exchange-traded contracts.
? SWAP: Swap is private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolio of forward contracts. The currency swap entails swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. There are a various types of currency swaps like as fixed-to-fixed currency swap, floating to floating swap, fixed to floating currency swap. In a swap normally three basic steps are involve. (1) Initial exchange of principal amount (2) Ongoing exchange of interest (3) Re - exchange of principal amount on maturity.
? OPTIONS : Currency option is a financial instrument that give the option holder a right and not the obligation, to buy or sell a given amount of foreign exchange at a fixed price per unit for a specified time period ( until the expiration date ). In
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LALA LAJPATRAI INSTITUTES OF MANAGEMENT other words, a foreign currency option is a contract for future delivery of a specified currency in exchange for another in which buyer of the option has to right to buy (call) or sell (put) a particular currency at an agreed price for or within specified period. The seller of the option gets the premium from the buyer of the option for the obligation undertaken in the contract. Options generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer dated options are called warrants and are generally traded OTC.
Currency risk is a type of risk in international trade that arises from the fluctuation in price of one currency against another. This is a permanent risk that will remain as long as currencies remain the medium of exchange for commercial transactions. Market fluctuations of relative currency values will continue to attract the attention of the Exporter, the manufacturer, the investor, the banker, the speculator, and the policy maker alike. While doing business in foreign currency, a contract is signed and the company quotes a price for the goods using a reasonable exchange rate. However, an Economic Events may upset even the best laid plans. In order to avoid Exchange Risk fluctuations the companies generally form strategy for dealing with exchange rate risk: 1. Currency Hedging: Currency hedging is technique used to avoid the risks associated with the changing value of currency while doing transactions in international trade. It is possible to take steps to hedge foreign currency risk. This may be done through one of the following options: 2. Billing foreign deals in Indian Rupees: This insulates the Indian exporter from Currency fluctuations. However, this may not be acceptable to the foreign buyer. Most of international trade transactions take place in one of the major foreign Currencies USD, Euro, Pounds Sterling, and Yen. 3. Forward contract. You agree to sell a fixed amount of foreign exchange (to convert this into your currency) at a future date, allowing for the risk that the buyer‘s payments are late. Options: You buy the right to have currency at an agreed rate within an agreed period. For example, if you expect to receive $35,000 in 3 months, time you could buy an option to convert $35,000 into your currency in 3 months. Options can be more expensive than a forward contract, but you don't need to compulsorily use your option.
4.
5. Foreign currency bank account and foreign currency borrowing: These may be suitable where you have cost in the foreign currency or in a currency whose exchange rate is related to that currency.
FOREIGN EXCHANGE BASICS
Foreign Exchange is a mechanism by which the Currency of one Country can be converted in to the currency of another country. This mechanism is used for either receiving or making payment in connection with foreign transaction. The Forex Market consists of the players like Banks, Financial Institutions, Brokers, Central Banks, Corporate and the Public at large etc. The Forex Deals - Merchant deals or InterBank deals-are undertaken by dealers who are engaged in buying and selling of the foreign currencies on behalf of the bank. The
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foreign currency market is a very big global market. It is bigger market than the stock market and the volume of the currency trade is to the tune of USD.3.21 trillion dollars per day. The bulk of the Forex market is ?Over the Counter? (OTC) market i.e. trades are effected on telephone/telex/fax, through electronic dealing systems or intermediation of brokers and not on the floor or pit of an exchange. The major participants of the market are Market Players and Market Makers: Market Makers are the ones who fix prices i.e. Dollar vs. Rupee by applying various models; basically they are in line with the purchasing power parity but are complex in nature. Market Players are the ones who are participating by holding positions in it. The market players mainly comprise of: ? Non bank entities that wish to exchange currencies to meet or hedge contractual commitments ? Speculators ? Arbitrageurs
? Hedging: Presume Entity A is expecting a remittance for USD 1000 on 27 August 08. Wants to lock in the foreign exchange rate today so that the value of inflow in Indian rupee terms is safeguarded. The entity can do so by selling one contract of USDINR futures since one contract is for USD 1000. Presume that the current spot rate is Rs.43 and ?USDINR 27 Aug 08‘ contract is trading at Rs.44.2500. Entity A shall do the following: Sell one August contract today. The value of the contract is Rs.44,250. Let us assume the RBI reference rate on August 27, 2008 is Rs.44.0000. The entity shall sell on August 27, 2008, USD 1000 in the spot market and get Rs. 44,000. The futures contract will settle at Rs.44.0000 (final settlement price = RBI reference rate). The return from the futures transaction would be Rs. 250, i.e. (Rs. 44,250 – Rs. 44,000). As may be observed, the effective rate for the remittance received by the entity A is Rs.44. 2500 (Rs.44,000 + Rs.250)/1000, while spot rate on that date was Rs.44.0000. The entity was able to hedge its exposure. ? Speculation: Bullish, buy futures Take the case of a speculator who has a view on the direction of the market. He would like to trade based on this view. He expects that the USD-INR rate presently at Rs.42, is to go up in the next two-three months. How can he trade based on this belief? In case he can buy dollars and hold it, by investing the necessary capital, he can profit if say the Rupee depreciates to Rs.42.50. Assuming he buys USD 10000, it would require an investment of Rs.4, 20,000. If the exchange rate moves as he expected in the next three months, then he shall make a profit of around Rs.10000. This works out to an annual return of around 4.76%. It may please be noted that the cost of funds invested is not considered in computing this return. A speculator can take exactly the same position on the exchange rate by using futures contracts. Let us see how this works. If the INR- USD is Rs.42 and the three month futures trade at Rs.42.40. The minimum contract size is USD 1000. Therefore the speculator may buy 10 contracts. The exposure shall
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be the same as above USD 10000. Presumably, the margin may be around Rs.21, 000. Three months later if the Rupee depreciates to Rs. 42.50 against USD, (on the day of expiration of the contract), the futures price shall converge to the spot price (Rs. 42.50) and he makes a profit of Rs.1000 on an investment of Rs.21, 000. This works out to an annual return of 19 percent. Because of the leverage they provide, futures form an attractive option for speculators. ? Speculation: Bearish, sell futures
Futures can be used by a speculator who believes that an underlying is over-valued and is likely to see a fall in price. How can he trade based on his opinion? In the absence of a deferral product, there wasn't much he could do to profit from his opinion. Today all he needs to do is sell the futures. Let us understand how this works. Typically futures move correspondingly with the underlying, as long as there is sufficient liquidity in the market. If the underlying price rises, so will the futures price. If the underlying price falls, so will the futures price. Now take the case of the trader who expects to see a fall in the price of USD-INR. He sells one two-month contract of futures on USD say at Rs. 42.20 (each contact for USD 1000). He pays a small margin on the same. Two months later, when the futures contract expires, USD-INR rate let us say is Rs.42. On the day of expiration, the spot
and the futures price converges. He has made a clean profit of 20 paise per dollar. For the one contract that he sold, this works out to be Rs.2000. ? Arbitrage: Arbitrage is the strategy of taking advantage of difference in price of the same or similar product between two or more markets. That is, arbitrage is striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. If the same or similar product is traded in say two different markets, any entity which has access to both the markets will be able to identify price differentials, if any. If in one of the markets the product is trading at higher price, then the entity shall buy the product in the cheaper market and sell in the costlier market and thus benefit from the price differential without any additional risk. One of the methods of arbitrage with regard to USD-INR could be a trading strategy between forwards and futures market. As we discussed earlier, the futures price and forward prices are arrived at using the principle of cost of carry. Such of those entities who can trade both forwards and futures shall be able to identify any mispricing between forwards and futures. If one of them is priced higher, the same shall be sold while simultaneously buying the other which is priced lower. If the tenor of both the contracts is same, since both forwards and futures shall be settled at the same RBI reference rate, the transaction shall result in a risk less profit. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies. Geographically, the markets span all the time zones from New Zealand to the West Coast of the United States. When it is 3:00 PM in Tokyo, it is 2:00 PM in Hong Kong. When it is 3:00 PM in Hong Kong, it is 1:00 PM in Singapore. At 3:00 PM in Singapore, it is 12:00 noon in Bahrain. When it is 3:00 PM in Bahrain, it is noon in Frankfurt and Zurich, and 11:00 AM in London. When it is 3:00 PM in London, it is 10:00 AM in New York. By the time New York is starting to wind down at 3:00 PM, it is noon in Los Angeles. By the time it is 3:00 PM in Los Angeles, it is 9:00 AM of the next day in Sydney. The gap between New York closing and Tokyo opening is about 2.5 hours. Thus, the market functions 24 hours enabling a trader to offset a position created in one market using another market.
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INDIA BALANCE OF PAYMENTS (BOP)
KEY INDICATORS OF INDIA'S BALANCE OF PAYMENTS
2007-08 Merchandize Trade Exports ($ on BoP basis) Growth Rate (percent) Imports ($ on BoP basis) Growth Rate (percent) Crude Oil Prices, Per Barrel (Indian Basket) Trade Balance ($ billion) Invisibles Net Invisibles ($ Billion) Net Invisibles Surplus/Trade Deficit (Percent) Invisible Receipts/Current Receipts (Percent) Services Receipts/Current Receipts (Percent) Private Transfers/Current Receipts (Percent) Current Account Current Receipts ($ Billion) Current Payments ($ Billion) Current Account Balance ($ Billion) Capital Account Gross Capital Inflows ($ Billion) Gross Capital Outflows ($ Billion) Net Capital Flows ($ Billion) Net FDI/Net Capital Flows (Percent) Net Portfolio Investment/Net capital Flows (Percent) Net ECBs/Net capital Flows (Percent) Reserves Import Cover of Reserves (In months) Outstanding Reserves as at end period ($ Billion)
2008-09
2008-09 (Q1) (PR) 43.0 42.9 118.8 -31.4 22.4 71.3 44.2 26.2 13.8
2009-10 (Q1) (P)
28.9 35.2 79.2 -91.6 74.6 81.4 47.2 28.6 13.8
5.4 14.3 82.4 -119.4 89.6 75.0 48.1 30.0 13.7
-21.0 -19.6 63.9 -26.0 20.2 77.7 49.9 28.9 17.2
314.8 331.8 -17.0 433.0 325.0 108.0 14.3 27.4 21.0 14.4 309.7
337.7 367.6 -29.8 302.5 293.3 9.1 191.3 -153.4 89.2 10.3 252.0
88.1 97.1 -9.0 90.9 79.7 11.1 80.5 -37.8 13.2 13.3 312.1
77.5 83.3 -5.8 78.5 71.8 6.7 101.4 122.7 -5.3 11.4 265.1
Balance of Payment Balance of Payment can be stated as the underlying reason for the foreign exchange of a country. Balance of Payments (BOP) is a systematic accounting record of a country‘s economic transactions with the rest of the world (ROW) during a given period of time. In other words, (BOP) shows a systematic accounting record of a nation‘s international transactions in goods, services, rewards to factors of
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Production, unilateral transfers, real capital, financial capital and official reserves during a period of one year.
Different types of economic transactions in BoP ? ? ? ? ? Exports of goods and services and the Payments received- one real transfer and one financial transfer Exports in return for imports or an international barter transaction- two real transfers Purchase of foreign securities by drawing a cheque on your foreign deposits-two financial transfers Unilateral gifts send abroad in kind- one real transfer Unilateral financial gifts- one financial transfer.
Components of BOP A. Current Account B. Capital Account C. Official Reserve Account (Monetary movements) A. Current Account Current account records transactions in goods or merchandise and invisibles with the rest of the world. ? Trade or Merchandise or Visible Account
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Trade or merchandise account covers exports and imports of all movable goods (cleared at customs barriers) which are visible in physical form, where the ownership of goods changes from residents to non-residents and vice versa. ? Invisible Account Invisible account covers exports and imports of all non- factor services; all transfer payments; and all income earned by residents on ownership of foreign financial and real assets.
Trade Balance + Invisible Balance= Current Account Balance B. Capital Account Capital account records a country‘s international transactions in financial capital and real assets . It mainly comprises foreign direct investment, foreign Portfolio Investment and other International banking flows like External Commercial Borrowings and NRI Deposits. Surplus and Deficit in Overall BOP BOP = Current Account Balance + Capital Account Balance BOP Surplus if this is Positive, BOP Deficit if this difference is negative C. Official Reserve account It records offsetting transactions like changes in foreign exchange reserves. Current Account Balance + Capital Account Balance + Official Reserve Balance = Zero as per Walrus Rule.
Different Card Rates at Banks Exchange Rate Calculations Forex contracts are for ?cash? or ?ready? delivery which means delivery same day, ?value next day? which means delivery next business day and ?spot? which is two business days ahead. The rates quoted by banks to their non-bank customers are called ?Merchant Rates?. Banks quote a variety of exchange rates. The so-called ?TT? rates are applicable for clean inward or outward remittances. ?TT buying rate? applies when an exporter asks the bank to collect an export bill and the bank pays the exporter only when it receives payment from the foreign buyer as well as in cancellation of forward sale contracts. ?TT selling rate? is applicable when the bank sells a foreign currency draft.
Different types of rates used in forex transactions:
Selling rates-
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?
TT Selling Rate – These rates are used for issue of Outward DD, MT & TT. This rate is calculated as: TT Selling Rate = A Base Rate + Exchange Margin The base rate is the inter-bank spot selling rate. The exchange margin is subject to a ceiling specified by the FEDAI (Foreign Exchange Dealers‘ Association of India).
Also for cancellation of purchase earlier made in foreign currency1. When refunding in foreign currency mail transfers and demand drafts converted in to Rupees. 2. Delinking / refund of foreign bills purchased / negotiated in foreign currency. ? Bill Selling Rate- Retirement of import bills under L.C. or collection. When an importer requests the bank to make a payment to a foreign supplier against a bill drawn on the importer, the banker has to handle documents related to the transaction. For this, the bank loads another margin over the TT selling rate to arrive at the Bill Selling Rate. Thus, Spot Bill Selling Rate = TT Selling Rate + Exchange Margin Travelers‘ Cheques Selling Rate- For sale of FTC. Rate applicable when a customer buys Foreign Currency Travelers ?cheques from the bank. FC Notes Selling Rate- For sale of Foreign Currency notes. Rate applicable when a customer buys Foreign Currency Cash from the bank.
? ?
Buying Rates? TT Buying Rate- Rate at which a Foreign Inward Remittance received by Telegraphic Transfer is converted into rupees. For converting all inward remittances in foreign currencies where the cover has been received. And hence for converting all outward bills sent for collection also. Cancellation of outward remittances like DD/MT sent by bank. This rate is calculated as: Spot TT Buying Rate = A Base Rate – Exchange Margin The base rate is the inter-bank rate. The purpose of exchange margin is to recover the costs involved and provide a profit margin to the bank. Bill Buying Rate- For purchase / discounting / negotiations of export documents. This rate is calculated as: Spot Bill Buying Rate = Inter-bank forward rate for a forward tenor equal to transit plus issuance period of the bill of any exchange margin For a forward bill purchase, the bank will start from the inter-bank forward rate for a tenor, which includes •Interval between current time and delivery date of the bill •Transit period •Issuance period of the bill and deduct an exchange margin Clean Cheque Buying Rate- When foreign currency instrument is purchased especially cheques where the realization will take place at a later date. TC Buying Rate- For encashment of travelers‘ cheques. Rate at which Foreign Currency Travellers cheques‘ deposited by the customer is converted into rupees. Currency Buying Rate- For encashment of currency notes. Rate at which Foreign Currency Cash deposited by the customer is converted into rupees.
?
? ? ?
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Foreign Exchange Mechanism
Types of transactions and settlement dates Settlement of a transaction takes place by transfer of deposits between the two parties and the day when these transactions are in effect is called the settlement date or the value date. The countries where the transfers take place are called settlement locations. The locations of the two banks in the countries of the two currencies involved in the trade, are dealing locations, which need not be the same as settlement locations. For e.g. a London bank can sell Swiss francs against US dollar to a Paris bank. Settlement locations may be New York and Geneva, while dealing locations are London and Paris. Depending upon the time elapsed between the transaction date and the settlement date; FOREX transactions can be categorized into ?spot‘ and ?forward‘ transactions. A third category called ?swaps‘ is a combination of a spot and a forward transaction.
In a spot transaction, the settlement or value date is two business days (T+2)ahead for European currencies, or the Yen traded against the dollar. The two-day period gives adequate time for the parties to send instructions to debit and credit the appropriate bank accounts at home and abroad. A complete requirement under the forex regulations and the exchange rate at which the transaction takes place is called the spot rate. A forward transaction involves an agreement today to buy or sell a specified amount of a foreign currency at a specified future date at a rate agreed upon today. It is a price at which a particular amount of a commodity, currency or security is to be delivered on a fixed date in the future, possibly as for as a year ahead. Traders agree to buy and sell currencies for settlement at least three days later, at predetermined exchange rates. This type of transaction often is used by business to reduce their exchange rate risk. The typical forward contract is for one month; three months; or six months, with three months being most common. Forward contracts for longer periods are not as common because of the great uncertainties involved. However, forward contract can be renegotiated for one or more periods when they become due. The equilibrium forward rate is determined at the intersection of the market demand and supply forces of forex for future delivery. The demand and supply of forward forex arise in the course of hedging, from forex speculation and from covered interest arbitrage
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Forward Price vs. Spot Price It is possible for a forward price of a currency to equal its spot price However, interest rates must be considered. The interest rate can be earned by holding different currencies usually varies, therefore forward price can be higher or lower than (at premium or discount to) the spot prices. It adds in Premium of every month it defines the time value of money in that period or that month on the basis of predictions about the growth and information of the market. RBI Reference Rate: There reference rate given by RBI is based on 12 noon rates of a few selected banks in Mumbai. Inter Bank Rates: Interbank rates are the rates which are quoted by the bank for buying and selling foreign currency in the interbank market, which works on wafer thin margins. For inter bank transactions the quotation is up to four decimals with the last two digits in multiples of 25. This market has certain peculiarity about itself i.e. the intention of the other party is not known so they quote both Bid and ask rates. Foreign Currency A/Cs: The accounts maintained by banks in various foreign currencies at foreign centers to facilitate dealings in foreign exchange. They are known as Nostro A/cs. AD‘s route all their forex transactions through the Nostro a/cs. A US Dollar account opened by our Treasury Branch with a Citibank New York will be known as Nostro account. Similarly, a rupee account opened with our ?A‘ category branch by a foreign branch or a foreign bank will be designated as Vostro account. London Branch maintaining INR A/c with the Mumbai Overseas Branch is a Vostro A/c. When London Branch draws a DD in INR on any ?A? or ?B? category branch, the same will be paid to the debit of London Branch Vostro a/c with Mumbai Overseas Branch. The foreign currency rates may be quoted in two ways: Direct Quotations/Home Currency Quotation. E.g. US$.1= Rs.40.50. In this case, amount of foreign currency is fixed while the equivalent amount of home currency is variable. Maxim used for the transaction is ?Buy low; Sell high?. Bank will always buy foreign currency at lower rate i.e. they will part with minimum amount of home currency and try to acquire as much of foreign currency as possible. While selling the foreign currency, bank will acquire as much of home currency as possible and part with as less of foreign currency as possible. Buying transaction – US$1 = Rs.40.52 & Sale transaction – US$1 = Rs.40.62
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Indirect Quotation or Foreign Currency Quotation: The example of this quotation is Rs.100 = US$.2.47. In this case, home currency unit is fixed while the foreign currency unit is variable. Maxim used for the transaction is ?Buy high; Sell low?. In this case, bank will try to buy as much of foreign currency as possible at the fixed amount of home currency i.e. at Rs.100.00. And, while selling the foreign currency, the bank will acquire as much of home currency as possible. Buying transaction- Rs.100.00 = US$.2.4695 & Sale transaction – Rs.100.00 = US$. 2.4615.
Two-way quotes \Bid and Ask: In all foreign exchange quotations offered by a dealer, there will always be two- figure- the buying rate and the selling rate. Bid is the highest price that the seller is offering for the particular currency. On the other hand, ask is the lowest price acceptable to the buyer. Together, the two prices constitute a quotation and the difference between the price offered by a dealer willing to sell something and the price he is willing to pay to buy it back. The bid-ask spread is amount by which the ask price exceeds the bid. This is essentially, the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it. For example, if the bid price is $20 and the ask price is $21 then the "bid-ask spread" is $1. The spread is usually rates as percentage cost of transacting in the forex market, which is Computed as follow: In the direct quotation, lower of the two rates will be a buying rate and the higher of the two rates will be a selling rate. If exchange rate is between USD and INR, then it will be quoted as followsUSD.1.00 =Rs.40.52- 40.57, The buying rate will be Rs.40.52 & selling rate will be Rs.40.57. If the Quotation is indirect, higher of the two rates will be buying rate and the lower of the two rates will be selling rate. Rs.100.00 = USD2.4695—2.4615 In the above quotation, the Buying rate will be USD2.4695 & Selling rate will be USD2.4615. When the two parties enter in to a contract and agree to exchange foreign currencies, they may deliver in one of the following manner: 1. On the same day- it will be called as ?Cash Transaction?. 2. Next day- it will be called as TOM Basis. 3. Within two banking days - on Spot Basis. It normally happens that the transfer of funds from one bank to another bank take time which should not more than two banking days from the next date of transaction. Both the banks may be maintaining foreign currency A/c at different banks and it may take some time to materialize the transaction. So, in the spot transaction, the settlement of payment will take two working days excluding holidays, if any. 4. If the delivery takes place beyond spot, the transaction will be termed as forward transaction. The period of delivery (of currency) will depend on the underlying contract. The forward transaction will normally be done to hedge adverse movement of exchange rate.
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And in case the delivery of currency is for longer period- say over one year-, the forward contract may be rolled over to hedge the risk. Forward contract may be for sale or purchase of foreign currency. Exchange rate is continuously changing and the rate may or may not be the same in future. The rate may be either costlier or cheaper or same. If the rate is costlier then the currency will be at premium. If rate is cheaper, it will be at discount and If the rate is same, it will be called at par. The forward rate may be arrived at as follows, depending upon whether it is at premium or at discount: Spot Rate + Premium = Forward Rate Spot Rate – Discount = Forward Rate For example, if the spot rate for US Dollar in the Forex market is as follows: USD. 1.00 = Rs.40.55 and one month premium is Rs.0.30. Then the forward rate will be quoted by adding premium to the spot rate --USD.1.00 = Rs.40.55 + 0.30 = Rs.40.85. Similarly, if the dollars is at a discount and for one month forward it is Rs.0.25. In that case, one month forward quotation for dollar, will be obtained by deducting discount from the spot rate-Rs.40.55-Rs.0.25 = Rs.40.30.
The Rule for Forward Rate – The premium should be added and the discount should be deducted from the spot rate. The rule applies to both sale and purchase transactions. In market quotations, the rates are quoted in two ways – one for purchase and another for sale. Similarly, the premium and discount are also quoted in two ways, one for purchase and another for sale. Spot- USD.1.00 = Rs.40.55 – 44.65 One month premium: 00.30-- 00.35 In purchase transaction, the bank would like to pay to the seller as much less an amount as possible for per unit of foreign currency. When currency is at premium, it means addition of premium to the spot rate. Lower of the two rates should be added to the spot rate. In the above example the spot-buying rate is Rs.40.55 and of the two premia, Rs.0.30 being lesser will be advantages to bank and therefore forward rate for one month would be Rs.40.85. The other premium- Rs.0.35-- that is higher between the two should not be added. In case of sale transaction, the spot rate is Rs.40.65 and forward premium is Rs.0.35, which is higher of the two. The forward sale rate would be USD.1.00 =Rs.40.95. This gives us the rule that – Add lesser premium for the buying rates & add higher premium for selling rate.
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Financial Indicators
Financial indicators form a part of the major parameter as it reveals the financial soundness of the company and helps in drawing conclusion. For calculating the working capital requirement, the company‘s financials are taken into consideration i.e. their assets and liabilities. Liabilities are further divided into current liabilities, term liabilities and net worth. Current liabilities are liabilities which are payable within 1 year. It also includes working capital bank finance, provision for tax and other statutory liability like rent, electricity etc. Working Capital bank finance is to be repayable on demand. Term Liabilities are liabilities which are payable after the duration of 3 years. Net worth includes the net worth of the client i.e. their Equity share capital and Reserves & Surplus. Assets are further divided into current assets, non-current assets like investment and advance for fixed assets, fixed assets and intangible assets like goodwill, patent, copyright. For testing the financial status of the company certain ratios are calculated like Current Ratio, Debt Equity Ratio, Quasi Debt Equity Ratio, Profitability Ratio, Interest Service Coverage Ratio and Debt Service Coverage Ratio. Ratios:
A) Current Ratio = Current Assets Current Liability Current Ratio denotes the liquidity position of the company and how fast the current assets can be liquidated in order to fund the current liabilities. The ideal ratio in case of Diamond Industry is 1.33: 1. B) Debt Equity Ratio = Debt Equity Debt is also known as the external liability and Equity denotes the internal liability of a company. This ratio indicates the company‘s total outside liabilities vis-à-vis their capital/ net worth. The ideal ratio in case of diamond industry is 3:1 as banks are of opinion that they are ready to finance 75% provided 25% is put by the exporter himself from his pocket.
Debt Equity Ratio = TOL (Total Outside Liability) Tangible Net Worth
Tangible Net Worth = Capital + Free Reserves.
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If any of the client invest in group companies which are generally not realizable immediately, if the investment in these companies is more than 10% then it is generally reduced from the Tangible Net Worth to arise at the Adjusted Net Worth then the DebtEquity Ratio is calculated on Adjusted Tangible Net Worth. C) Quasi Debt Equity Ratio = Total Outside Liability – Unsecured Loan Tangible Net Worth + Unsecured Loan
The Unsecured Loans which are taken by the Diamond trader are mostly loans taken from friends and relatives so they are treated as Quasi Capital. Most of the times banks do keep a track of the same as these Quasi Capitals are short term in nature. When the Debt-Equity Ratio is below 3:1 then Quasi Debt Equity Ratio is taken into consideration.
D) Profitability Ratio = Net Profit Sales This takes into account the profitability of the business in percentage to sales. In Banking Industry it is mainly from 0.5% to 1.5%. E) Interest Coverage Ratio = Cash Accrual + Interest Interest This ratio is calculated in order to ascertain whether the company is in position to pay the interest without any hassles. The minimum ratio expected is 1.5 by the banks. Interest is the interest charged by the bank Cash Accrual = Net profit + Depreciation. F) Debt Service Coverage Ratio = Net Profit + Depreciation + Interest on term Loan + Installment of term Loan ___________________________________________ Installment of term loan + Interest on term Loan This ratio is generally worked out when term loans are granted to the client. Term Loan is generally repayable after a time lag of 3 years. Its main objective is to service debt. Ideally this ratio should be 1.5:1.It is worked out by adding Cash Accrual with interest on term loan divided by installments and interest in order to find out whether the company is in position to pay interest and installment together.
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Global Indicators: Greece Crisis 2010:
Greece has chronic difficulty in funding its government expenditures out of tax revenues because of rampant tax evasion. The global downturn, which has driven up unemployment in Greece (to 10 percent) and this has further led to bankruptcy of the Greece Economy. Its national debt, most of it owed to foreigners, of some $400 billion is greater than its Gross Domestic Product, and its current annual budget deficit is almost 13 percent of GDP, which means that its indebtedness is growing rapidly
Year 2010 2009 2008 2007
Jan 46.1 48.79 39.32 44.33
Feb 46.41 49.58 39.74 44.13
Mar 45.45 51.12 40.32 43.94
Apr 44.47 50.02 39.95 42.07
May 45.99 48.6 41.98 40.86
Jun 46.54 47.73 42.85 40.81
Jul 48.36 42.77 40.43
Aug
Sep
Oct
Nov
Dec
48.34 48.38 46.8 46.61 46.55 42.97 45.69 48.77 49.2 48.47 40.87 40.22 39.51 39.44 39.42
Despite the measures taken by the government, it is desperately seeking financial aid from EU countries and International Monetary Fund. The economy still needs to borrow more money at lower interest rates from private lenders in order to avoid defaulting on its public debt or reducing government spending even more sharply than it is doing as further reduction will lead to serious political consequences. The debt crisis ensuing in Greece seems to be impacting currencies and prices of commodities like oil in a big way. Not only has it dashed the hopes of the Euro to emerge as an alternative reserve currency to the US dollar, but has actually propped up the latter due to emerging risk and investors seeking shelter in the safe haven of the US dollar
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LALA LAJPATRAI INSTITUTES OF MANAGEMENT
The problems plaguing the Euro are not limited only to the Greek crisis, but debt problems in the nations of Portugal, Spain and Italy are adding to Euro woes as well. Similar debt issues had led to a decline in the US dollar
47.5 47 46.5 46 45.5 45 44.5 44
TTB BLB BLS TTS BLB TTB TTS BLS
However, with the recent debt problems unfolding in the Euro zone, the Euro seems to have been hit by a double whammy resulting in it losing some of its sheen. While, the Euro zone debt crisis has hit the Euro directly, the economic uncertainty in the Euro zone is leading investors to take cover under the safety of the US dollar. So the dollar has got appreciated from 17th May 2010-21st May 2010 majorly i.e. from (Rs.45 47.33) app.
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LALA LAJPATRAI INSTITUTES OF MANAGEMENT
SUGGESTION: ? Online System should be set up for punching rates directly from the branch instead of calling in dealing room at treasury department at BKC, Mumbai. The swift message should be linked with Finnacle so that no separate registers are to be maintained by the branch which leads to reduction of paper work.
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BIBLIOGRAPHY:
? ? ? ? ?
www.rbi.org www.investopedia.com Journal of FEDAI Export circular of RBI www.nseindia.com
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doc_789140766.docx