Professional Documents
Culture Documents
Central
1.
When the dealing is between a bank and a merchant (could be exporter, importer, individuals) when the dealing is between banks (inter-bank segment)
2.
Contd.
The
out through select branches of the bank that have foreign exchange facility.
At
The FEMA 1999 has come into effect from 1/6/2000 and the erstwhile
Foreign Exchange Regulation Act (FERA) has been repealed from that date.
The objective of FEMA is not to control and restrict foreign exchange transactions, rather to regulate them so as to facilitate
Contd.
While
the Act, the RBI is vested with powers vide section 47 of the Act
outside India (i.e. Non residents) only in the manner prescribed under FEMA and rules and regulations made under this Act.
Contd.
i) a person residing in India for more than 182 days during the course of the
preceding financial year, but does not include a person who stays outside India on taking up employment /carrying on business outside India
Contd.
Contd.
Person of Indian origin (PIO) : A foreign national of any country other than Bangladesh or Pakistan can be considered as a person of
Contd.
A non resident(i.e. person resident outside India) can be considered as a Non resident Indian if he is either a i) citizen of India or ii) person
of Indian origin.
Overseas Corporate Body means a company, partnership firm, society, other corporate body owned directly or indirectly to the extent of 60 % by non resident Indians and includes overseas trusts in which not less than 60% beneficial interest is directly held by non resident Indians directly or indirectly but irrevocably.
Contd.
All transactions in foreign exchange can be broadly classified into two categories namely a) Capital Account transactions and b) Current Account transactions.
All transactions undertaken by a resident that alters his assets or liabilities outside India are called Capital Account transactions. Similarly all transactions undertaken by a non resident that alters his asset or liability in India are also called Capital account transactions.
Contd.
Examples:
outside India
A person resident in India invests in securities/ shares issued in foreign currency outside India
A resident borrows in foreign exchange from outside India A non resident keeps his deposits with a bank in India
Contd.
A Current Account transaction does not affect the balance sheet items (i.e. assets/ liabilities) of a resident outside India or of a non resident in India.
All foreign exchange transactions undertaken by a resident that do not alter his assets/ liabilities are called current account transactions.
Similarly all foreign exchange transactions undertaken by a non resident that do not alter his assets/ liabilities in India are called current account transactions.
Contd.
Examples:
If an exporter receives payment towards the export made by him, it is a revenue receipt for him ( i.e. it will credit Export Sale Account, which is a profit and loss account item and not a balance sheet item).
Remittances for living expenses of parents/ spouse/ children living abroad or remittances in connection with travel, education, medical expenses etc. are classified as current account transactions.
Contd.
Authorized Person : Any entity (i.e. company/ firm/ individual) appointed by RBI to deal in (i.e. buy and sell) foreign exchange is
Depending upon the powers/ authority delegated by RBI to them, the authorized persons can be broadly classified into four categories, namely Authorized Dealer category I
Contd.
Generally Scheduled banks (Commercial banks, State Co-op banks, Urban co-op banks) can be appointed as Authorized Dealer Category I. They can do all current and capital account transactions as delegated to them by the RBI.
Contd.
Full fledged Money changers do the exclusive activity of changing foreign currency into home currency and home currency into foreign
currency.
Different categories of branches of an Authorized Dealer: The branches which are not only permitted to handle all types of business, but also maintain and operate Banks nostro account at foreign centre are called Category A branches.
Contd.
The branches permitted to handle all types of foreign exchange transactions but not maintaining nostro accounts at foreign centers are called Category B branches. However they are permitted to operate banks nostro account at
foreign centers.
FEDAI is an association and self regulating body of all authorized dealers. It is registered as a non profit making company under provisions of section 25 of the Companies Act.
The main objective of the Association is to further the interests of the Authorized Dealers and to regulate their dealings both interse and with public, brokers, RBI and all other bodies.
followed by all its members. These rules are notified with the approval of
RBI. All authorized dealers are required to submit an undertaking to RBI for adhering to these rules.
Contd.
Nostro Account (Our Account with Foreign Correspondents Abroad) :
If Indian Overseas Bank maintains a Current Account with American Express bank, New York , this Account is called the Nostro Account of IOB with AMEX, NY. The literal meaning of Nostro account is our account with you.
A nostro account is maintained in foreign currency i.e. currency of the country where the account is maintained.
Contd.
Vostro Account (Foreign Correspondents Accounts with us in Rupees):
Contd.
and bank B are maintaining their nostro accounts with AMEX bank
and bank A wants to transfer say USD 50000 from its nostro account to nostro account of bank B, it would write to AMEX bank- Debit our account by USD 50000 and Credit Loro account- B bank
ENC Statement: It is a fortnightly statement submitted by AD branch to RBI giving details of all export bills handled during the fortnight.
BEF Statement: It is a half yearly statement submitted by AD to RBI giving details of default in non submission of Bills of Entries in case of import.
Contd.
In case of a buying transaction, the authorized dealer buys/ acquires foreign exchange from the customer and makes payment in
Contd.
When a quotation gives both the buying and selling rate, it is called a two-way quote. E.g. 1 USD = Rs 49.06/ Rs 49.20
In case of a direct quote, the lower rate is the buying rate (Bid Rate)
and the higher rate is the selling rate (Offer Rate).
Bid rate means the rate at which the authorized dealer bids to buy foreign exchange in the market and offer rate means the rate at which the authorized dealer offers to sell foreign exchange in the market.
The mean of Bid rate and Offer rate is called Middle Rate. The price
difference between Bid and Offer rates is called Basis Point Spread.
Contd.
Buying rates are classified into two categories i) TT Buying Rate is applied to those buying transactions where the AD has already received the foreign exchange to the credit of its nostro account. Example : Payment of FCNR deposit, realization of foreign cheques/ bills sent on collection basis and the nostro account of the AD is credited by its correspondent, Cancellation of DD ii) Bill Buying Rate is applicable to those buying transactions for
which the AD buys the foreign exchange today, but gets the credit to
its nostro account at a future date. Example: Purchase of export bills.
Contd.
Selling rates are of two types: i)TT Selling Rate is applied to all transactions which do not involve
Contd.
A Forex transaction to buy or sell currency can be broadly categorized as a spot transaction or a forward transaction.
In the case of a forward transaction, the purchase or sale is agreed, but will take place at some time in the future, thereby fixing the rate for a
Contd.
Every forward contract has three main elements.
The rate of exchange is fixed when the contract is made. The contract is for delivery of the currency, at an agreed future time, either a
specific date or any time between two specific dates, depending on the
contract terms.
Notional rate :
Where an AD receives foreign currency for opening/ crediting foreign currency accounts like FCNR deposit account, RFC deposit account,
A notional rate is not a real rate, but an assumed rate to give notional value to foreign currency deposits for accounting purposes. All banks fix the notional rate in line with the Weekly average of Daily rates for different currencies advised by FEDAI on every Friday.
Contd.
Cross Rate : If the rate of a foreign currency is given in terms of another foreign currency, it is called a cross rate. e.g. in India, the rate
Base Rate is the rate at which bank is able to get funds from market either for sale or purchase.
Merchant Rates are rates actually quoted to public based on ongoing market rate at the time approached by the customer. Merchant rates
Deposit Accounts:
RBI has given general permission to all ADs to open three types of accounts in the name of residents outside India. These are NRO, NRE and FCNR(B) accounts.
NRO ( Non resident ordinary) a/c can be opened by any person resident outside India, whether he is NRI or not., but NRE and FCNR(B) a/c can be opened only by NRIs.
The balance in NRO a/c can be repatriated outside India only to the extent permitted by RBI, but the balance in NRE and FCNR(B) is freely repatriable without any reference to RBI.
NRO and NRE a/c are maintained in rupees, but FCNR(B) is maintained only in certain foreign currencies viz. USD, EUR, GBP, JPY, CAD and AUD.
NRO and NRE a/c schemes permit all types of deposit accounts, but under FCNR(B), only term deposits can be opened.
EEFC(Exchange earners foreign currency) a/c: Exporters of goods and services and other beneficiaries of inward remittances are permitted to open EEFC a/c in foreign currency.
NRO account can be opened in the name of any non residents. NRO account can be opened in the name of a foreign tourist during his
short visit to India, which should be closed at the time of his departure
from India.
Where an Indian citizen having a resident account, leaves India and becomes a non resident, his resident account should be automatically designated as NRO account. The account holder can also credit any
other local receipts due to him (like rent, sale proceeds of house).
Where a non resident Indian receives legitimate dues / income in India, he can open a NRO a/c with such funds.
Contd.
NRO a/c can also be opened by foreign exchange remitted through normal banking channels. Example: foreign DD, foreign Travelers
Account can be opened jointly with another non resident or resident. While crediting interest on NRO deposits, banks are required to deduct tax at source.
deposits.
NRE a/c can only be opened in the name of non resident Indians. The documents required for opening NRE account are i) A/c opening form
Joint A/c: Permitted to be opened along with any other NRI. Relationship between joint holders should be recorded. It cannot be
Contd.
Source of funds for opening the a/c : This can be by way of DD/TT/ International money order/ personal cheques in any permitted
RBI has allowed banks to allow temporary overdraft up to Rs 50000. The overdraft and interest should be paid back by fresh remittance from abroad/ transfer from NRE/ FCNR account , within two weeks
Contd.
Credits which are freely allowed in NRE a/c :
Credit from local sources like rent, interest, dividend, pension etc, provided AD is satisfied that the fund represents current income and
Contd.
Permitted debits : Local payments/ disbursements, remittances abroad, transfer to NRE/ FCNR a/c are freely permitted.
Banks have been prohibited from granting fresh loans or renew existing loans in excess of RS 100 lacs against NRE deposits and FCNR deposits, either to the depositor himself or to third parties. The loan amount should not be credited to NRE/ FCNR(B) accounts nor
FCNR scheme was introduced to eliminate the exchange risk faced by a non resident making deposit in rupees, as under the FCNR scheme
Type of A/c: Only Term deposits can be accepted under the scheme. The period of deposit should be minimum one year and maximum five years. SB, CD a/c cannot be opened under FCNR(B) scheme.
Contd.
Designated Currency of Deposit: The a/c can be opened only in six designated currencies. USD, GBP, EUR, JPY, CAD, AUD
Contd.
Depositor becoming resident : When the NRI returns to India for permanent settlement, the deposit can be allowed to run as it is till maturity. Alternatively, the depositor can convert it to a rupee deposit and such conversion will be treated as a premature closure and will be done at TT Buying rate.
Contd.
Loan against FCNR(B) deposit:
Loans can be sanctioned in rupees in India to the depositor against his deposit. Such loans can be repaid out of remittance from abroad or out of the maturity proceeds of the deposit or from funds held in his NRO a/c. ADs are also permitted to sanction loans in foreign currency against FCNR(B) deposits.
The period of the loan should be within the maturity period of the
Contd.
Management of FCNR(B) funds by AD: The ADs are
This deposit scheme is meant for persons of Indian nationality or origin (NRIs and PIOs)who return to India for permanent settlement, after being
resident outside India for a continuous period of not less than one year.
Type: Account can be Term deposits or SB or CD. Balance in RFC a/c can be freely remitted abroad for any bonafide use of the account holder or his dependents and investments abroad.
No credit facility can be sanctioned against RFC deposits. Advantages: i)Interest income on the deposits is completely free from income tax ii) Availability of foreign exchange for future use iii) Conversion to Rupee at any time.
A person resident in India can open this a/c out of foreign exchange acquired from the following sources.
The a/c will be in the form of Current Account only and shall not bear any interest.
Letter of Credit:
A Letter of Credit (LC) is an instrument for settling trade payments and is an arrangement of making payment against documents.
Contd..
The importer knows that the negotiating bank will not effect payment to the seller unless and until the latter tenders the documents strictly in
The seller is assured of getting payment as long as he presents the documents as per LC terms to the negotiating bank.
International Chamber of Commerce (ICC) is a non governmental business organization, founded in 1919 . It formulates business
Contd..
ICC has come out with standard set of rules for operation of letters of credits, guarantees, collection bills etc. and has published
Contd..
The different parties involved in an import transaction with a LC can be the following:
Contd..
Advising Bank : An advising bank is one which advises the LC to the beneficiary, thereby assuring the genuineness of the LC. It is normally
Confirming Bank: A confirming bank is one which adds guarantee to the LC opened by another bank, thereby undertaking the responsibility of payment/ negotiation/ acceptance under the credit, in
Contd..
Reimbursing Bank: This is the bank which is authorized to honor the reimbursement claim in the settlement of negotiation/acceptance or payment lodged with it by the paying, negotiating or accepting bank. It is normally the bank with which the issuing bank has an account
The importer signs a purchase contract for buying certain goods. The contract would include, among others, specific clauses relating to
The importer requests his bank to open an LC in favor of the exporter. The importers bank opens an LC as per the application. The opening bank forwards the original LC to the advising bank in the exporters country.
Contd..
The advising bank, after satisfying itself about the authenticity of the credit, forwards the same to the exporter.
In case any terms are not as agreed, the importer would be asked to make the required amendments to the LC.
Contd..
The exporter prepares export documents and submits to his bank. The exporters bank (negotiating bank) verifies all the documents with
the LC.
If the documents are in conformity with the terms of the LC, and all other conditions are satisfied, then the bank negotiates the bill.
The exporter receives the payment in his bank account if he wants post shipment finance.
The LC issuing bank receives the bill and documents from the
exporters bank.
Contd..
The importer receives the bill from the LC issuing bank and checks the documents. He then accepts/ pays the bill. On acceptance/
The LC issuing bank reimburses the amount to the negotiating bank, if the documents are in order.
Types of LC :
Irrevocable LC: This is a basic form of LC most commonly used in foreign trade. An irrevocable LC cannot be revoked or amended
without the consent of all parties thereto. Under UCP all LCs are
deemed irrevocable.
Contd..
Revolving LC: Under the terms and conditions of a revolving LC, the amount under the revolving LC can revolve in relation to time or
Deferred Payment LC: This type of LC allows the issuing bank to make payment to the beneficiary in installments. The timing and
Contd..
Transferable LC: In some cases, the seller or beneficiary may not be the actual producer of the goods. In such cases, the seller (exporter)
Standby LC: Standby LCs are used in lieu of bank guarantees in some countries e.g. the USA.
Contd..
Back to Back LC: This is a variant of the transferable LC. In this case, instead of transferring the original LC to the third party supplier, the
Anticipatory LC : It provides for payment to the beneficiary at the pre shipment stage. Under this LC, a Red clause LC provides for payment up
Contd..
It is important to note that all parties in the LC transaction deal with Documents and not with Goods. Documentary collection under the LC may be carried out in two different ways.
Documents against Payment: Documents are release to the importer only against payment. These are also known as sight collection and correspond to cash.
Contd..
Documents against Acceptance: Documents are released to the importer only against the acceptance of a draft. hey are also known as
INCOTERMS can be expanded as International Commercial Terms. They are standard trade definitions most commonly used in International sales contracts. Each Incoterms rule is referred to by a three letter abbreviation. Examples: FOB CFR & CIF
FOB (free on board): The price quoted is such that the seller has to
bear all costs till he loads the goods on the ship named in the contract.
Contd..
CFR (cost and freight) : It means the price quoted is such that the seller has to bear all costs and expenses till the goods are loaded on
CIF(cost, insurance & freight): The price quoted by the seller includes all costs till goods are loaded on board and the freight and transit insurance up to the named place of destination.
Trade Finance:
The export credit scheme to finance exporters is intended to facilitate exports through providing working capital finance to exporters at
Pre shipment Finance (Packing Credit) is a short term working capital finance provided by a bank to an exporter enabling the latter to
The PC availed against an LC/ order will be adjusted by the Bank from out of the exports made against that LC/order. The bank makes
Running account facility : This is a facility granted to exporters with good track record to avail PC without lodging an LC/order. He borrower will have to produce the LC/order to the bank within a
reasonable time.
Contd..
The liquidation of PCs outstanding in the running account is done on a first in first out basis.
Refinance can be available by banks from the RBI against the PC granted to the exporters up to a period not exceeding within 180 days.
The foreign currency loans (FCL) granted to the exporters by the banks are known as PCFC. The salient features of PCFC are similar to
rupee export credit. However, PCFC is available only for cash exports
in foreign currencies USD, GBP, JPY and EUR
For lending under the PCFC scheme, banks can use the foreign currency balances available with them, in EEFC account/ RFC account/ FCNR accounts.
Contd..
PCFC is self liquidating in nature and is liquidated by purchasing/ discounting of related bills.
Contd..
Purchase: (Providing the finance against export documents without LC, covered by drafts drawn at sight at spot bill buying rate.
Contd..
After making the shipment, the exporter presents to his bank the det of export documents, such as bill of lading/airway bill, invoice, bill of exchange, insurance policy, certificate of origin, inspection certificate, packing list etc. The bank then verifies the documents and confirms that the shipment of goods is as per the terms of LC/ confirmed order.