Forex

Union Bank of India, one of the major public sector banks in India having a correspondent relationship with 345 leading international banks at all major international centers. The bank has entered into Rupee Drawing Arrangements (RDA) with 23 International Banks and 13 Exchange Houses in Middle East. The Bank has also introduced a Internet-based Union eRemit Product for NRIs in U.K. and U.S.A. as well as for Exchange Houses in Middle East. The modern state-of-the-art dealing room at its Integrated Treasury Branch at Mumbai handles exchange business of its clientele. The bank has retained its primacy as a leading market maker both in spot and forward markets, along with foreign exchange swap markets. The forex dealing desk at the Treasury is provided with all modern communication facilities and is in the process of linking all its authorized branches via Reuters Automated Dealing (RETAD) System, to provide on-line quotes for foreign exchange transactions. Through its large network of authorized branches, the bank caters to the foreign exchange needs of its clientele engaged in export and import trade and the Treasury provides rates for conversion of all major world currencies like U S Dollar, Sterling Pounds, Euro, Swiss Francs, Japanese Yen and other exotic currencies. The services to the customers of the Bank include hedging of foreign currency risks by providing forward covers and various derivative products. The Bank is in a position to deliver its products promptly and efficiently to its NRI customers through select pool of Customers Relationship Managers (CRMs) posted at strategic locations. The range of products includes remittance facilities and acceptance of deposits in Indian Rupees (NRE / NRO) as well as in designated foreign currencies (FCNR). Resident as well as Returning Indians can avail of benefits like Resident Foreign Currency Accounts (RFC). Union Bank of India also offers derivative products like Interest Rate Swaps (IRS), Forward Rate Agreements (FRA) for hedging interest rate risks and for currency risks, Currency Swaps and Options

Foriegn Exchange department in a bank has following functions:

EXPORTS

Pre-shipment Advances Post-shipment Advances Export Guarantees Advising/Confirming Letter of Credit Facilitating project exports Bills for collection

IMPORTS

Opening letters of credit Advance bills Import loans and guarantees.

EXCHANGE DEALINGS

Rate computation Nostro/Vostro Accounts Forward contracts Derivatives Exchange position and cover operations

REMITTANCES

Issue of DD, MT, TT etc. Encashment of cheques, DD, MT, TT etc. Issue and encashment of travelers' cheques Sale and encashment of foreign currency notes Non-resident deposits

STATISTICS

Submission of returns Collection of credit information

Letters of Credit
Letters of Credit (LC) are an integral part of international business. A LC is a bank's promise to pay a seller on behalf of a buyer, providing the seller meets the terms and conditions stated in the credit. Banks act as intermediaries and have no actual contact with the goods bought and sold. A Letter of Credit is a document issued by a financial institution which usually provides an irrevocable payment undertaking, used primarily in trade finance. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. Participants in LC Process

Buyer Issuing Bank Advising Bank Seller (Beneficiary)

The LC serves as a guarantee that the buyer will receive the merchandise specified and that the seller will be paid in a timely manner. Each LC transaction generally involves four parties: the two parties to the transaction (buyer and seller) and the bank for each of these parties. The LC transaction occurs between two parties at a time: buyer and seller, buyer and issuing bank (which issues the LC on behalf of the buyer), issuing bank and advising bank (which authenticates the credit and manages the LC process on behalf of the seller), advising bank and seller. All LCs contain details of the payment undertaking given by the bank (issuing bank) on behalf of the buyer to pay a seller a given amount of money within a specific timeframe and at a specified place. The LC also outlines the terms and conditions of the transaction.

Steps in the Letter of Credit Process

I. II. III. IV. V. VI.

Buyer and seller agree to terms including means of transport, period of credit offered (if any), and latest date of shipment acceptable. Buyer applies to bank for issue of letter of credit. Bank will evaluate buyer's credit standing, and may require cash cover and/or reduction of other lending limits. Issuing bank issues LC, sending it to the Advising bank by airmail or electronic means such as telex or SWIFT. Advising bank establishes authenticity of the letter of credit using signature books or test codes, then informs seller (beneficiary). Seller should now check that LC matches commercial agreement and that all its terms and conditions can be satisfied. Seller ships the goods, then assembles the documents called for in the LC (invoice, transport document, etc.).

VII. VIII. IX.

The Advising bank checks the documents against the LC. If the documents are compliant, the bank pays the seller and forwards the documents to the Issuing bank. The Issuing bank now checks the documents itself. If they are in order, it reimburses the seller's bank immediately. The Issuing bank debits the buyer and releases the documents (including transport document), so the buyer can claim the goods from the carrier.

Methods of payment: Letter of credit is one the most convenient methods of selling payments in International Trade. It provides complete financial security to the seller of goods. Seller may not know the credit worthiness of the buyer and the prevailing regulations in the country of the buyer. But once the letter of credit is established by the buyer`s bank on behalf of the buyer in favor of the seller and the seller submits then set of required documents to the opening bank or to the nominated bank, the seller is assured of payment. Buyer also gets the advantage of his banker`s assistance closely scrutinizing the documents and only after receiving the relevant documentary evidence from the seller by the banker nominated in the credit, the nominated banker releases payment.

Method of payment Advance

Timing of payment Before shipment

Goods Availability At destination arrival When L/C is paid

Sellers risk None

Buyers risk 100% reliance on seller

Sight L/C

Presentation of documents after shipment

Minimal: Issuing confirming banks obligation to pay if documents confirm to L/C Minimal: Issuing

Assurance of shipment, but depends on seller to supply goods ordered

Usance L/C

Maturity date or at discount

At acceptance of

Regardless of product

of the draft

the draft drawn under the L/C

confirming banks obligation to pay if documents confirm to L/C 100% reliance on buyer

quality, payment due at maturity

Open Account

Buyers discretion

Upon arrival

Zero

List of documents used in the LC process:

1.

Bill of exchange (B/E)

A B/E is also referred to as Draft or Hundi. In many countries a B/E is recognized as a legal document. In India section 5 of the Negotiable Instruments Act, 1881 defines the B/E. A B/E performs the 5 basic functions which are Collecting payment: B/E shows that there is a commercial of trade transaction underlying Demanding Payment: When a B/E is drawn and presented to the drawee (buyer) for Extending Credit: When a B/E is drawn for a particular tenure it means that the drawer the B/E drawn and it is an instrument for collecting payment arising out of such a transaction. payment, it amounts to having made a demand on the drawee to pay the payment. (seller) is allowing the drawee to make payment at a future date i.e. the seller is extending his buyer a credit. Promise of Payment: Certain B/E`s are drawn on acceptance basis, i.e. the drawee will be given the documents upon his acceptance to pay the bill at a specified tenure. Such an accepted bill of exchange is sufficient evidence of promise of payment by the drawee. Receipt of Payment: When the amount shown on a B/E is paid by the drawee, the payee endorses the B/E is received payment. Thus a discharged B/E acts as a receipt for having paid the amount.

2. Commercial invoice Also known as document of contents because it generally contains all the information required for the preparation of all other documents. There is no standard format for commercial invoice but it normally contains the following: DATE NAME & ADDRESS OF THE SELLER AND THE BUYER ORDER NO. /CONTRACT NO. / PROFORMA INVOICE NO. Or DETAILS OF CREDIT DESCRIBTION QUANTITY QUALITY OF GOODS TERMS OF SALE PORT OF SHIPMENT AND PORT OF DESTINATION VALUE OF GOODS AND ANY ADJUSTMENTS LIKE ADVANCE, DISCOUNT ETC. SHIPPING MARKS OR NO. OF PACKAGES ANY OTHER ADDITIONAL CERTIFICATIONS REQUIRED UNDER THE CREDIT

3. Certificate of origin The certificate of origin indicates the country where the goods were originally produced or manufactured. Generally an independent agency like Chamber of Commerce, Export Promotion Council, Trade association or any other body which is authorized in this behalf issues a certificate of origin of goods. 4. Packing list It is a document which shows the nature and number of packages with distinctive numbers or marks. This is generally needed by the importer when he is importing different types or sizes of merchandise so that he may identify the nature of goods in each package. It is also used by customs for checking the goods on random basis. 5. Certificate of analysis and quality

It is a certificate that indicates the quality, technical composition and intricate nature of goods, described in the invoice. The certificate may be given by the exporter himself or an institution which is competent or nominated to give such a certificate. 6. Certificate of inspection It is a document certifying that the goods have been inspected. This document is generally desired by the importer, so that he can be sure that the right type of goods ordered is being sent by the exporter. 7. Bill of lading It is a transport document representing movement of goods by water. A bill of lading is a formal receipt given by the ship owners or their authorized agents that the goods mentioned there in (quantity, quality, description, etc) are shipped to a specified date and vessel and are deliverable to a person mentioned therein or to his order after payment of all dues of the shipping company. Generally bills of lading are issued in a set of two or three and presentation of any one of them will entitle the holder to claim the goods and render the other negotiable copies void. 8. Airway Bill It is an acknowledgement issued by an airline company or their authorized agents stating that they have received the goods detailed therein for dispatch by air to the named consignee at the address stated therein. 9. Multimodal transport documents This document is issued when the movement of goods involves more than one mode of transport. 10. Insurance policy It is a contract of insurance. In international trade marine insurance is the most common document obtained either by exporter or importer for safety of goods. The policies basically cover the perils of sea.

Scrutiny of Documents under Credit: Scrutiny of documents drawn under credit is one of the most important functions of Union Bank of India, which is an AD-I category bank. In case of import letter of credit, the issuing bank has the authority either to accept or refuse the documents. Issuing bank has to scrutinize the documents and if they choose to refuse the document they should inform their refusal within 5 banking days excluding the date of receipt of documents, listing down the discrepancy. In case of documents drawn under export letter of credit, discrepant documents will not form a valid security for the negotiating bank. Securing an indemnity letter from the beneficiary, for negotiating discrepant documents will no way help in obtaining payment from the issuing bank.