-A-Study-on-Foreign-Exchange-Operations-in-Union-Bank-of

8/7/2019 -A-Study-on-Foreign-Exchange-Operations-in-Union-Bank-of

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A STUDY ON FOREIGN EXCHANGE OPERATIONS

IN

UNION BANK OF INDIA, CHENNAI

PROJECT REPORT

Submitted in partial fulfillment of the

Requirements for the award of

Post Graduation Program in Business Management

2008

NAME : JOTHISWAROOPINI

REGISTRATION NO : 3024

Under the Supervision of

Mr. Sarvan Krishnamurthy , M.S. (Indust rial Mgt), B.E. (Mech)

KOHINOOR BUSINESS SCHOOL, KHANDALA

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DECLARATION

I, JOTHISWAROOPINI a Bona-fide student of Kohinoor Business School, Khandala,

hereby declare that the project titled A study on Foreign Exchange Operations in Union

Bank of India, Chennai in partial fulfillment of the requirements of the Post Graduation

Program in Business Management is my or iginal work.

Date :

Place :

Signatur e

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ACKNOWLEDGEMENT

I am deeply indebted to Dr.B.P.Verma, The Director, Kohinoor Business

School, Khandala for having allowed me to carry out the project successfully.

I specially thank Mr. Sarvan Krishnamurthy, Assistant Professor,Strategic Management for his constant guidance, professional help and support during

the course of the project.

I express my grateful thanks to Mr. Venkataramaiah, Chief Manager,

Human Resource Management for according me an opportunity to be associated with

Union Bank of India, Chennai . My deepest gratitude to Mr. Parthasarathy, Senior

Manager ; Mrs. Suseela, Assistant Manager, Foreign Exchange ; Mr. Santhosh,

Assistant Manager, Foreign Exchange for their immense help and cooperation to

per mit me to complete this intensive project.

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CHAPTER - IIII

EXECUTIVE SUMMARY

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EXECUTIVE SUMMARY

The Reser ve Bank of India administers exchange controls in accordance with the

Governments policy designed to maintain general control over the for eign exchange

situation, particularly outgoing financial flows. The Foreign Exchange Regulation Act

(FERA), 1973 confers powers to the Reserve Bank of India concerning for eign exchange

control. General or specific permission is required from the Reserve Bank of India for all

foreign exchange transactions. Foreign companies oper ating in India are governed by the

Foreign Exchange Regulation Act (FERA), 1973, which sets guidelines for bank

accounts, loans, foreign exchange trading and the remittance of dividends and profits.

The Asian Clearing Union (ACU) was established in 1974 under the auspices of the

Economic and Social Commission for Asia and the Pacific as a mechanism for settlementof payments among participating countries central banks. The Reserve Bank of India is

one of the original participants. The other participants are Bangladesh, the Islamic

Republic of Iran, Nepal, Pakistan, Sri Lanka, and Myanmar. All authorized banks in India

can handle transactions cleared through the Asian Clearing Union. It is compulsory that

all eligible payments among participants be settled through the Asian Clearing Union.

In March 1993, the government ended certain FERA restr ictions on domestic

borrowing, trading and acquisition of immovable property by companies with more than

40 % foreign equity. Residents may use up to 25 % of foreign exchange earnings to

maintain a for eign currency bank account in India. Foreign employees, liaison offices,

project offices and branches of foreign companies may open and use a resident bank

account in I ndian currency provided that they have approval from the Reserve Bank for

oper ations in India.

In August 1994, the rupee was made fully convertible on the current account.

Rupee convertibility on the trade account is restricted by the negative list of imports and

exports and limited to those involved in trade. All export and impor t transactions are

conducted at the market rate of exchange.

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CHAPTER IV

INDUSTRY PROFILE

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INDUSTRY PROFILE

The Indian Banking industry, which is gover ned by the Banking Regulation Act of India,

1949 can be broadly classif ied into two major categories, non-scheduled banks and

scheduled banks. Scheduled banks comprise commercial banks and the co-operative

banks. In terms of ownership, commercial banks can be further grouped into nationalized

banks, the State Bank of India and its group banks, regional rural banks and private sector

banks (the old / new domestic and for eign). These banks have over 67,000 branches

spread across the country.

The first phase of financial refor ms resulted in the nationalization of 14 major banks in

1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in

a significant growth in the geogr aphical coverage of banks. Every bank had to earmark a

minimum percentage of their loan portfolio to sectors identified as prior ity sectors. The

manufactur ing sector also grew during the 1970s in protected environments and the

banking sector was a critical source. The next wave of reforms saw the nationalization of

6 more commercial banks in 1980. Since then the number of scheduled commercial banks

increased four-fold and the number of bank branches increased eight- fold.

After the second phase of financial sector reforms and liberalization of the sector in the

early nineties, the Public Sector Banks (PSBs) found it extremely difficult to compete

with the new private sector banks and the foreign banks. The new pr ivate sector banks

first made their appearance after the guidelines permitting them were issued in January

1993. Eight new private sector banks are presently in oper ation. These banks due to their

late start have access to state-of-the-art technology, which in turn helps them to save on

manpower costs and provides better services.

During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a

25 percent share in deposits and 28.1 percent share in credit. The 20 nationalized banks

accounted for 53.2 percent of the deposits and 47.5 percent of credit during the same

per iod. The share of foreign banks (numbering 42), regional rural banks and other

scheduled commercial banks accounted for 5.7 percent, 3.9 percent and 12.2 percent

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respectively in deposits and 8.41 percent, 3.14 percent and 12.85 percent respectively in

credit during the year 2000.

The industr y is currently in a transition phase. On the one hand, the Public Sector Banks,

which are the mainstay of the I ndian Banking system, are in the process of shedding their

flab in terms of excessive manpower, excessive Non Per forming Assets (NPAs) and

excessive governmental equity, while on the other hand the private sector banks are

consolidating themselves through mergers and acquisitions.

Public Sector Banks, which currently account for more than 78 percent of total banking

industr y assets are saddled with non-performing assets (a mind-boggling Rs 830 billion in

2000), falling revenues from traditional sources, lack of modern technology and amassive workforce while the new pr ivate sector banks are forging ahead and rewriting

the traditional banking business model by way of their sheer innovation and service. The

Public Sector Banks are of course currently working out challenging strategies even as 20

percent of their massive employee strength has dwindled in the wake of the successful

Voluntary Retirement Schemes ( VRS) schemes.

The private players however cannot match the Public Sector Banks great reach, great

size and access to low cost deposits. Therefore one of the means for them to combat the

Public Sector Banks has been through the merger and acquisition (M& A) route. Over the

last two years, the industr y has witnessed several such instances. The UTI bank- Global

Trust Bank merger however opened a Pandoras box and brought about the realization

that all was not well in the functioning of many of the private sector banks.

Private sector Banks have pioneered internet banking, phone banking, anywhere banking,

mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various

other services and integrated them into the mainstream banking arena, while the Public

Sector Banks are still grappling with disgruntled employees in the after math of successful

VRS schemes. Also, following Indias commitment to the WTO agreement in respect of

the services sector, for eign banks, including both new and the existing ones, have been

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per mitted to open up to 12 branches a year with effect from 1998-99 as against the earlier

stipulation of 8 branches.

Talks of government diluting their equity from 51 percent to 33 percent in November

2000 have also opened up a new opportunity for the takeover of even the Public Sector

Banks. The FDI rules being more rationalized in Q1FY02 may also pave the way for

Foreign banks taking the M& A route to acquire willing Indian partners.

Meanwhile the economic and corporate sector slowdown has led to an increasing number

of banks focusing on the retail segment. Many of them are also entering the new vistas of

Insurance. Banks with their phenomenal reach and a regular interface with the retail

investor are the best placed to enter into the insurance sector. Banks in India have beenallowed to provide fee-based insurance services without risk participation invest in an

insurance company for providing infrastructure and services support and set up of a

separate joint-venture insurance company with risk participation.

After the first phase and second phase of financial refor ms, in the 1980s commercial

banks began to function in a highly regulated environment, with administered interest

rate structure, quantitative restrictions on credit flows, high reserve requirements and

reservation of a significant proportion of lendable resources for the pr ior ity and the

government sectors. The restrictive regulatory nor ms led to the credit rationing for the

private sector and the interest rate controls led to the unproductive use of credit and low

levels of investment and growth. The resultant financial repression led to decline in

productivity and efficiency and erosion of profitability of the banking sector in general.

This was when the need to develop a sound commercial banking system was felt. This

was wor ked out mainly with the help of the recommendations of the Committee on the

Financial System (Chairman: Shri M. Narasimham), 1991. The resultant financial sector

refor ms called for interest rate flexibility for banks, reduction in reserve requirements,

and a number of structur al measures. Interest rates have thus been steadily deregulated in

the past few years with banks being free to fix their Prime Lending Rates (PLRs) and

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deposit rates for most banking products. Credit market reforms included introduction of

new instruments of credit, changes in the credit deliver y system and integration of

functional roles of diverse players, such as, banks, financial institutions and non-banking

financial companies (NBFCs). Domestic Pr ivate Sector Banks were allowed to be set up,

PSBs were allowed to access the markets to shore up their Cars.

The growth in the Indian Banking Industr y has been more qualitative than quantitative

and it is expected to remain the same in the coming years. Based on the projections made

in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan,

the report forecasts that the pace of expansion in the balance-sheets of banks is likely to

decelerate. The total assets of all scheduled commercial banks by end- March 2010 are

estimated at Rs 40, 90,000 crores. That will comprise about 65 per cent of GDP at current

market prices as compared to 67 per cent in 2002- 03. Bank assets are expected to grow at

an annual composite rate of 13.4 per cent during the rest of the decade as against the

growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that

there will be large additions to the capital base and reserves on the liability side.

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CHAPTER - V

COMPANY PROFILE

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COMPANY PROFILE

Brief history of the bank and its constitution :-

Prior to the Nationalisation of major banks in 1969, Union Bank was functioning

as a limited liability company with a Board of Director s elected by its share holders.

Union Bank was incorporated on 11 of November 1919, having its Registered Office inth

Bombay. It was included in the 2 Schedule to the Reserve Bank of I ndia Act on 5 ofnd th

July 1935 and was granted a license under section 22 of the Banking Regulation Act,

1949 on 10 of December 1952. By 1969, Union Bank was well established in differentth

parts of the countr y. It was nationalized along with thirteen other major banks with effect

from 19 July 1969, under the Banking companies ( Acquisition and Transfer ofth

Undertakings ) Act, 1970. It is now a Corporation established by an Act of Parliamentwith a common seal.

The bank came out with its maiden Initial Public Offering of 1800 lacs equity

shares of Rs. 10/- each at a premium of Rs. 6/- per share, in August 2002. The response to

this Initial Public Offer aggregating to Rs.288 crores (Rs. 180 crores + share premium Rs.

108 crores) was overwhelming and was over subscr ibed by 5.2 times. As a sequel to this

Initial Public Of fer, Government of India holding is reduced to 60.85 % of the total

equity capital (Post IPO August 2002) of the bank. The banks affairs are managed by

the chairman and Managing Director, as per the direction and control of the Board of

Directors constituted by the Government of India. Besides appointing the chair man and

Managing Director, the Government has also appointed an Executive Director for the

bank. Other directors on the Board include one director each representing the Reser ve

Bank of India, Government of India, the Banks officer staff, the Banks non-officer staff

and Nominated Directors.

After the IPO, the constitution of the Board of Directors will also include four

representatives of share holders. The bank continues to be a Scheduled Bank under the

Reserve Bank of I ndia Act. It is required to maintain statutory minimum balances with

the Reser ve Bank of India calculated on the basis of the banks Demand and Time

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Liabilities and is eligible for financial accommodation and other benefits as a Scheduled

Bank from the Reserve Bank of India.

It also continues to be an Authorized Dealer in Foreign Exchange and is

authorized to deal in all currencies. It continues to be subject to the supervision and

control of the Reserve Bank of India under the pr ovision of the Banking Regulations Act

in regard to var ious matters such as inspection, opening and shifting of branches,

maintenance of statutory liquidity, and compliance with Directives of the Reserve Bank

of India in the matters of Income Recognition and Asset classification, Disclosure Norms

and preparation and audit of Balance sheet and Profit and Loss account etc. The bank also

continues to be an Insured Bank under the Deposit Insurance Corporation Act.

The bank is, however, free to set its own norms and rules and regulations in the

matter of granting of loans and advances, making investments, trading in securities,

formation of Deposit Schemes and pr icing of its deposits and advances and other

services. The bank carries out this exercise through Assets and Liability Management by

collecting relevant data from branches and depending on the market conditions.

Union Bank of India is firmly committed to consolidating and maintaining its

identity as a leading, innovative commercial Bank, with a proactive approach to the

changing needs of the society. This has resulted in a wide gamut of products and services,

made available to its valuable clientele in cater ing to the smallest of their needs. Today,

with its efficient, value-added services, sustained growth, consistent profitability and

development of new technologies, Union Bank has ensured complete customer delight,

living up to its image of, GOOD PEOPLE TO BANK WITH . Anticipative banking-

the ability to gauge the customer's needs well ahead of real-time - for ms the vital

ingredient in value- based services to effectively reduce the gap between expectations and

deliverables.

The key to the success of any organization lies with its people. No wonder, Union Bank's

unique family of about 26,000 qualified / skilled employees is and ever will be dedicated

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and delighted to serve the discerning customer with professionalism and

wholeheartedness.

Organizational Set up :-

The revamping of the organizational set up of the bank started in 1997 98 is

now complete and the resultant 3 tier management structure as shown below is in place :

1. Central Management : Central ( corporate ) office including Field General

Managers Offices ( extended aim of Centr al Office )

2. Regional Management : Regional Offices in the field.

3. Branch Management : Branch Offices in the field.

The above three tiers of management constitute the banks management structure.However, at present, three Zonal Offices are also functioning in the field at the following

centres and are reporting directly to the Central Office.

1. Ahmedabad covering branches in the state of Gujarat

2. Pune - covering branches in the state of Maharashtra ( except branches under

Metropolitan Mumbai Zone ) and Goa.

3. Bhopal - covering branches in the state of Madhya Pradesh and Chattisgarh.

Central Office, Mumbai :

Central Office or Central Management is responsible for planning, policy

formulation, budgeting, finalization of accounts and liaisoning with the Government,

Reserve Bank of India, other financial institutions and other author ities.

It formulates Corpor ate Plans long term as well as short term in consultation

with Field General Managers and extends guidance / assistance to field functionaries in

implementing these plans.

The Managing Director, who is the Chief Executive of the bank, is directly

responsible to the Board of Directors for implementation of its policy decisions and

smooth running of the bank. He exercises overall control over the banks affairs with the

assistance of the Executive Director and other Executives. The corporate level functions

are appropriately grouped on functional basis for effective working and each of these

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groups is headed by a Top Executive. These gr oups are placed under the charge of

General Managers at coordinating level. The concerned General Managers report to the

Executive Director and evolve operational policies and programmes under the guidance

of the Executive Director / Managing Director. The Executive Director will report to the

Managing Director. The top Executive in charge of Vigilance will report on vigilance

matters directly to the Managing Director. The coordinating and functional level

Executives perform such duties and exercise such powers as may from time to time be

delegated to them by the Board of Directors or the Managing Director.

Field General Managers Office ( FGMO ) :

The Field General Managers Office is conceptualized to bring the Head Office

closer to the grass roots via its presence in the field. The role focus of Field GeneralManagers Office is designed to serve this basic objective without creating a tier.

The Field General Managers Office is responsible for

Meeting competition

Leadership support, challenges and development of the people in the field.

Translating the corporate policies into practice, as well as providing feed-back

and suggestions on the update of the policies.

Promote the culture of computerization and its effective utilization.

Field General Managers Office will conduct evaluation studies in various areas

of its operations with a view to bringing about qualitative shift in working of regions /

branches. They would render guidance, assistance and help to improve regional / branch

oper ations.

Regional Offices :

Branches have been grouped into Regions. Each identified Region will be under

the charge of a Regional Head an executive in Senior / Top Management Grade. The

Regional Office or Regional Management level shall be directly responsible for

implementation of the policies of the bank controlling branch oper ations including

business development, branch expansion, sanctioning and follow-up of advances, etc. In

other wor ds, Regional Office is the first controlling management tier for branches. It shall

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provide appropriate leadership to the branches to accomplish the Regional objectives. In

Lead Distr icts, Lead District Mangers shall be provided to undertake Lead

responsibilities. Those Regional Offices located in Lead Distr icts shall be additionally

responsible for Lead activities such as preparation of Annual Credit Plans and Annual

Action Plans for the Distr ict, monitoring of progress etc,.

Foreign Exchange business has emerged as an area of vital importance in the

development strategy of banks the world over. The rapidly expanding global market with

innovative financial products, presents challenging opportunities in international banking.

Union Bank of India commenced foreign exchange oper ations with a provisional license

in 1955. In the initial years, it utilized the services of The Chartered Bank Ltd., whosesystems were largely adopted when the full fledged authorized dealers license was

granted by Reserve Bank of India in 1956. The Foreign Division as it was then called,

was set up by experienced officials from foreign banks, including Mr.U.S.Prabhu and

Mr.J.B.Desai from the First National City Bank of New York Ltd., Robert J.Angus from

the National Westminster Bank Ltd., and others.

The quantum of Foreign Exchange business rose impressively during the sixties and

seventies, with the bank being awarded on more than one occasion, certificates of merit

from the Gover nment of India, for its contribution to export development. The banks

expertise in the field of Foreign Exchange operations was acknowledged in the banking

industr y with major banks deputing their officials to Union bank for training and

consultation.

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CHAPTER VI

RESEARCH METHODOLOGY

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RESEARCH METHODOLOGY

The project study has been done with the help of Observation method. The value of

observation is that we can collect the original data at the time they occur. We need not

depend on reports by others. Another strength is that we can secure information that most

participants would ignore either because it is so common and expected or because it is

not seen as relevant. The third advantage of observation is that it alone can capture thewhole event as it occurs in its natural environment. Whereas the environment of an

exper iment may seem contrived to participants, and the number and types of questions

limit the range of responses gathered from respondents, observation is less restr ictive

than most primary collection methods. Finally, participants seem to accept an

observational intrusion better than they respond to questioning. Observation is less

demanding of them and normally has a less biasing effect on their behavior than does

questioning.

Direct observation occurs when the observer is physically present and personally

monitors what takes place. This approach is very flexible because it allows the observer

to react to and report subtle aspects of events and behaviors as they occur. A weakness of

this approach is that observers perception circuits may become overloaded as events

move quickly, and observers must later try to reconstruct what they were not able to

record.

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CHAPTER - VII

TREASURY

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TREASURY

Credit Policy

Resources mobilization and deployment thereof in the most profitable manner within the

frame work stipulated by the Regulator i.e. the Reserve Bank of India are the main

functions of any bank. The major portion of the deployment of resources is through credit

dispensation and hence the returns thereon and safety thereof are of paramount

importance. Hence the policy of lending is for mulated mainly from this angle. The policy

envisages, in the light of the dynamic and multifarious changes in the financial sector in

the recent past, as also the various directives issued by the Regulator during the

intervening per iod, a sustained growth plan of the advances portfolio. It is designed witha focus on optimum usage of resour ces without compromising on the asset quality, the

strategies for deployment of credit, system of assessments, financial parameters, pricing,

prudential norms, r isk management, etc,. It also indicates the chosen areas for credit

deployment, low prior ity areas, borrower standards, group approach, consortium

arrangements, geographical spread and sectoral deployment of credit.

The primar y objectives of the credit policy are as under :-

Ensuring the loan assets remain safe & secure,

Ensuring the loan assets remain perfor ming,

Ensuring the profitable deployment of resources enduring Asset Liability

matching and recycling of funds,

Ensuring due compliance of regulatory norms, particularly Capital Adequacy

norm issues, Income Recognition, Asset Classif ication etc.,

Ensuring balanced deployment of credit to various sector and geographical

regions, and

Introduction of Risk Management concepts for credit portfolio in a scientific

manner.

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Chosen areas for Credit Policy :-

Priority Sector lending

Agr icultural Sector

Small Scale Industry

Cottage I ndustries,

Khadi Village Industries,

Artisans and Tiny Industries, etc,.

Weaker Section

Credit to Women for upliftment and economic development

Export Finance

Software Developers and Service providersCredit to Midsized Corporates

This includes both short term and long term requirements such as

Commercial papers, external commercial borrowing, foreign currency

loans, public deposits, private placement of debentures and bonds, etc,.

The top corporate borrowers having good credit rating reduce their

dependence on bank finance and large limits sanctioned to them remain

unutilised to a great extent.

Infrastructure Financing

Activities involved in Infrastructure Financing are Roads, Ports, Power,

Telecom, Ur ban infrastructure facilities, Development of Industrial areas.

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CREDIT POLICY

Fund Based Credit Limit Non-Fund Based Credit Limit

1. Working Capital 1. Inland / Import Letter of

a. Secured Credit

facility a. DA basisb. Unsecured b. DP basis

facility 2. Deferred Payment

2. Term Finance Guarantees

a. Secured 3. Letters of Guarantee

facility

Managing Director and Executive Director are empowered to sanction credit facilities to

parties within their delegated authority without any ceiling as to fund based and non-fund

based limits. The maximum Fund based and Non-Fund based limits that can be

sanctioned to any single borrower is restricted to 9 times the Tangible Net Worth of the

borrower.

Working Capital Term Loan ( WCTL ) is given to improve the current ratio and

reduction in margin will not fall within the ambit.

Working Capital :-

The most important aspect while prepar ing a credit proposal is working out the credit

requirement of the customer in the appropriate manner so that the funds placed at his

disposal are put to optimum use. The bank will have to make its own assessment of credit

requirements of the borrowers based on a total study of borrowers business operations,

ie., taking into account the production / processing cycle of industry as well as the

financial and other relevant parameters of the borrowers.

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Methods to assess Bank Finance / Bank Credit :

1. Turnover Method

The working capital requirement under this method is to be computed on the

basis of 20 % of the projected annual turnover. In order to ensure that there is a

minimum margin by way of promoters contribution to support the working capital

needs, the borrowers are required to bring in at least 5 % of the projected annual

turnover as their contr ibution towards margin. The projected turnover has to be

interpreted as gross sales inclusive of excise duty. As regards 5 % of the promoters

stake, the same should be brought in by way of Net Wor king Capital and it is

expected that wherever the level of holding of Current Assets / Production /

Processing cycle is longer, then the borrower should bring in proportionately higherstake in relation to his requirement of Bank Finance.

2. Flexible Bank Finance

Under the system, Fund based working capital requirement will be assessed as

the difference between Wor king Capital Gap and Projected Net Working Capital.

Though the benchmark for Current Ratio will continue to be 1.33 : 1, we may accept

some deviation in the same provided the Current Ratio is not less than 1.17 : 1 . In

cases where the Current Ratios have deterior ated on account of diversions taking

place because of short term funds flow to Fixed Assets, we may correct the position

by giving a Term Loan to be repaid within 12 to 36 months provided the Debt Service

Coverage Ratio, Debt Equity Ratio, and security coverage are at acceptable levels.

In the assessment method based on the Maximum Per missible Bank Finance

(MPBF) concept, the amount of working capital Finance is arrived at as a residual

source after netting off from the Wor king Capital Gap, the available Net Wor king

Capital or the required minimum Net Working Capital whichever is higher. The

projected bank borrowing which reflects the finance sought by the borrower, will be

validated as hitherto with reference to the operating cycle of the borrower, projected

level of operations, nature of projected build up of Current Asset / Current Liability,

profitability, liquidity, etc,. Where these parameters are acceptable, the projected

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bank borrowing will stand validated for sanction. This amount will be termed as

Flexible Bank Finance .

3. The Cash Budget System

Presently Cash Budget method is in use for assessing working capital finance

for seasonal industries and for construction activity. I n these cases, the required

finance is quantified from the projected cash flows and not from the projected values

of assets and liabilities. In this method of assessment, besides the cash budget, other

aspects like the borrowers projected profitability, liquidity, gearing, funds flow etc,.

are also analysed.

Term Finance :-

A loan is termed as Term Loan when it has been sanctioned with an or iginal

repayment period of not less than 36 months. The maximum period for repayment of

term loans other than Housing loans shall be normally 84 months ( including mor atorium

per iod) . This may however, be increased to 180 months in respect of infrastructural

projects and other projects having long gestation periods. For Housing loans, the

repayments may be extended up to 240 months. Term lending institutions have generally

been assigned the responsibility of granting term loans to industries both large scale and

small scale for industrial purposes.

In considering the project feasibility, the following points may be taken into

account.

1. Economic Feasibility.

Whether the project belongs to the priority sector and / or is likely to help

development of backward region(s). Whether it is social benefit or iented,

employment oriented or earner of foreign exchange; gestation per iod required in

relation to size of investments and benefits.

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2. Technical Feasibility

Technical know- how is required and its availability, the rate of technological

obsolescence of the proposed method and processes; evaluation of the proposed

location of the project in terms of availability of raw materials, power, fuel, labour.

3. Manager ial Feasibility

Whether the promoters are entrepreneurs only or managers as well, the extent of

managerial experience possessed by them, whether they have any plans to ensure

sustained supply of managers through a programme of management education and

training.

4. Organisational Feasibility

Whether a separate organization will be required for the project or it can be

accommodated within the existing inter nal contr ol system like inventory control, preventive maintenance and adequacy of organization structure, whether there is

proper training programme for apprentice, skilled labour and technical personnel and

organization arrangement to take care of this aspect.

5. Commercial Feasibility

Whether there is adequate arrangement for procurement of materials and services

and reasonableness of the terms of purchase; whether arrangements have been made

to obtain license from the State and Central Governments for foreign exchange,

capital issues, import of equipment and stress.

6. Financial Feasibility

Whether the firm undertaking the project is financially sound; assessment of fund

requirements till the project goes on stream such as capital expenditure, interest on

loans, working capital, initial expenses, r etur n on capital employed, etc,.

Letter of Credit for purchase / import of raw mater ial should normally be sanctioned to

customers, who have cash credit facility so that the payment can be made by debiting

cash credit etc,. If it is for capital equipments, the same should backed by a sanction of a

term loan otherwise backed by 100 % or 110 % cash margin. It can be either on DA basis

i.e. Deliverable against Acceptance or on DP basis i.e. Deliverable against Payment basis.

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Deferred Payment Guarantee Loan ( DPGL ) are issued normally for purchasing capital

equipments and hence such requests should be put to the same degree of appraisal

required for sanctioning Term Loan as the redemption of Deferred Payment Guarantee

will be associated with the return on employing the capital equipment covered by the

DPGL on the cash flow / profitability, Debt Equity Ratio, Debt Service Coverage Ratio,

etc., of the fir m / company seeking the facility. Further adequate cash margin should be

insisted for such facilities.

Letters of Guarantee are issued for various purposes which take the form of per for mance

or financial guarantees. A guarantee which lays stress on the performance of certain act

like supply of a product, completion of any work, for achievement of certain level of

exports etc., will constitute a performance guarantee. A guarantee for discharge of only

the pecuniar y liability of a third party on default will constitute a financial guarantee.

Since the Risk Weight for the capital adequacy pur pose of financial guarantees is mor e,

the charges for the same are kept at a higher level than for performance guarantee for

which the Risk Weight is less.

Difference between Letter of Credit and Letter of Guarantee :-

The liability of Letter of Credit gets extinguished upon effecting the payment on

receipt of documents. The contingent liability ( consequently Capital Adequacy for the

Bank ) gets extinguished only on receipt of original Letter of Guarantee duly discharged

or at least letter of discharge, for which we have to get the guarantee bond returned by the

benef iciary and efforts should be made to get back the Guarantee bond or getting a letter

of discharge in the prescribed manner so that the bank need not maintain capital on the

expired guarantee(s).

Excess / Ad-hoc Powers :-

Excess may be interpreted as a facility of a tempor ary nature sanctioned for meeting the

temporary mismatches on cash flows of the borrowers for a period normally not

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exceeding 7 days, subject to availability of Drawing Power. Excess powers have been

given to all the delegates.

Ad- hoc may be interpreted as any facility, which is sanctioned for a period normally not

exceeding 3 months the need for which has ar isen due to unexpected situation like receipt

of additional or ders, increase in sales beyond projected level, short term mismatches in

cash flows, bunched receipt of raw materials, etc,. Ad-hoc powers have been given only

to the Regional Heads and above in the controlling offices and Branch Managers.

Credit Risk Management (CRM) :-

It has been introduced for effective contr ol, monitor ing and assessment of various

risks and distr ibution thereof amongst var ious sectors and segments. Credit RiskManagement system covers various aspects viz., Delegation of Powers, Prudential Limits

and Norms, Risk Rating System, Risk Pr icing, Portfolio Management, Review

Mechanism Documentation and Legal Compliance.

Pre-requisites to be observed :-

The borrowers should be the customers of the Bank and the Branch should have

reasonable experience of their dealings. It may, however, be possible that

prospective borrowers, in some cases may not be the customers of the Bank.

Branch Managers before sanctioning or recommending credit lines to such

prospective borrowers, should satisfy themselves as regards purpose of finance

and integrity or credit worthiness, etc,. of the borrowers.

An appropriate application in writing as well as the prescribed Credit Infor mation

Form will be obtained from the borrower.

Every accommodation will be justified by the borrowers past perfor mance or

record of his dealings with the Bank and supported by a good Credit Report on

him. A Credit Report on the party will be compiled before granting any

accommodation. I n case of a new connection which is a part of group, having

banking arrangement with other banks, satisfactory Credit Report, from the group

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bankers, should be obtained on overall activities and creditworthiness of the

borrowers.

Reasonable requirement for any new connection :-

Borrower Company should have

Current ratio of 1.17 and above

Debt Equity Ratio of less than 2 : 1

Total outside Liabilities to Net Worth Ratio of less than 4 : 1, and

Debt Service Coverage Ratio of 1.5 : 1

Different types of borrowers :-1. Individuals

If the borrower is an individual, it should be ensured that he is not a minor,

that he / she is not of unsound mind, or that he / she is not an undischarged insolvent.

2. Joint Hindu Family

If the borrower is a Joint Hindu Family, prescribed Karta For m must be

obtained to bind the co-parceners and to secure their consent to all acts of Karta in

conducting the Bank account.

3. Sole Proprietorship Firms

If an individual carr ies on business under a trade name, a declaration of sole

proprietorship in the prescribed form must be obtained.

4. Partnership Fir ms

If the borrower is a partnership firm, it is preferable that it is a registered

partnership. Partnership letter in the prescribed for m showing the names of all

partners should also be taken.

5. Limited Liability Companies

If the borrower is a limited company whether public or private, the date of its

registration must be noted from the Certificate of Registration which should be seen

and a copy may be kept on record. Under Section 293(1)(D) of Companies Act,

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1. Latest Balance sheet, Trading and Profit and Loss Account together with the

break-up of Sundry Creditor s, Debtors, Loans, Deposits and Advances.

2. Copy of last Income-Tax Assessment Order and latest Income-Tax Returns

supported by challans of Advance Income-Tax paid.

3. Copies of Proprietors / Partners / Directors last Wealth Tax Assessment

Orders and latest returns filed supported by challans of tax payment, if any.

4. Partners Capital Account and Personal Balance sheet

5. Details of payment of statutory dues.

Foreign Currency Loans are permitted

To exporters for working capital needs

To importers for meeting their impor t obligations

To importers of capital goods

To enable customers to prepay medium term Foreign Currency Loans, raised

earlier for meeting their capital expenditure from overseas financial institutions.

To high value corporate clients of good track record to meet their working capital

requirements in Rupees in substitution of their existing Working Capital Demand

Loan (WCDL).

As extension of Foreign Currency Loan, exposes customers to exchange r isk, the

customers are required to cover their exchange risk through Forward cover of

appropriate maturity. The credit decision in respect of the above categories of Foreign

Currency Loan is in the purview of the Central Advances Department which is based on

the prudential norms, credit discipline and credit monitoring guidelines in force. The

interest rate for such loans is the appropriate LIBOR plus the Banks spread. Any request

from customers of good track record for availing of Foreign Currency Loan in

substitution of Working Capital Demand Loan is to be referred to Central Office for their

approval. Central Office will permit extension of Foreign Currency Loans, based on

customers credit rating, track record and further business potential, after ascertaining the

availability Foreign Currency Resources, for the same from the International Banking

Division.

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On receipt of the appropriate sanction for extension of Foreign Currency Loan,

the branch will inform I nternational Service Branch (ISB), Mumbai, about customers

request for loan draw down giving two clear days notice and also confirming that

compliance of sanction terms and secur ity documents have been obtained. International

Service Branch, after ascertaining the availability of funds and based on guidelines given

by International Banking Division, will convey their concurrence for draw down. The

branch has to report the transaction to International Service Branch if the loan is to be

converted to Rupee and obtain appropr iate exchange rate (Buying T.T Rate) and also the

Interest rate applicable to the Transaction.

Repayment :- On maturity date, the customer has to repay the loan plus unpaid interest in

foreign currency. This is done by either purchasing for eign currency from the Bank atselling T.T Rate or by tendering export documents for purchase in which case documents

can be purchased under FDBP (FCY) Scheme or by adjustment of proceeds of Export

documents sent on collection basis.

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Foreign Exchange

Foreign Exchange as def ined in Foreign Exchange Management Act (FEMA) 1999

means foreign currency and includes

All deposits, credits, balances payable in any foreign currency ;

Drafts, travellers cheques, letters of credit and bills of exchange expressed or

drawn in Indian currency and payable in for eign exchange; and

Drafts, travellers cheques, letters of credit or bills of exchange drawn by banks,

institutions or persons outside India but payable in Indian currency .

Foreign Exchange does not involve trade and services alone, but also includes external

borrowing and investment.

FOREIGN EXCHANGE

International External

Trade Receipts and

Payments

1. Import 1. Current

Trade Account

2. Export 2. Capital

Trade Account

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Exchange Control Administration

The exchange control administration gets its statutory footing by virtue of the

Foreign Exchange Management Act (FEMA) 1999. Based on the Act, Government of

India and Reserve Bank of India ( acting as custodians of foreign exchange on behalf of

Government of India ) are empowered to issue notifications regulating foreign exchange

dealings to ensure its proper utilization. The instructions / guidelines of Reserve Bank of

India are administered through the Author ized Persons in foreign exchange.

Authorized persons are banks and institutions authorized by Reserve Bank of

India to deal in foreign exchange. Additionally, Reserve Bank of India has granted

money changers licenses to certain fir ms, hotels and other organizations permittingthem to deal in for eign currency notes, coins and travelers cheques.

Full Fledged Money Changers are authorized to undertake both purchase and sale

transactions with public.

Restricted Money Changers are author ized only to purchase foreign currency

notes, coins and travelers cheques, subject to the condition that all such

collections are surrendered by them in turn to authorized dealers in foreign

exchange / Full fledged money changers.

International trade is the movement of goods and services from one countr y to another.

The seller supplies the goods or services to the buyer and the buyer in turn pays for the

goods or services received from the seller. The payment for the international sale /

purchase amongst countries, each with their sovereign currently necessitates the supplier

and buyer agreeing to settle the transaction in anyone currency. International trade is

therefore is one of the primar y reasons for the inflow and outflow of for eign exchange.

The law on the subject of Impor t and export from India is governed by the Foreign Trade

Development and Regulation Act 1992.

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INTERNATIONAL TRADE

I mport Trade Export Tr ade

Non Fund Pre - Post -

Fund Based Shipment Shipment

Based CreditCredit Facility

Facility

Import Trade

Import is defined as bringing into India any item by sea, land, air or through

electronic media. Control over import of goods into India is exercised by the Director

General of Foreign Trade (DGFT) under the Ministr y of Commerce, Government of

India. The policy enunciated by this Authority is made available to the public through the

Export-Import (EXIM) Policy announced from time to time. Earlier the EXIM Policy

used to be announced annually. However, with effect from 1.4.1992, the Government of

India comes out with EXIM Policy valid for 5 years period to afford continuity and

stability.

For the purposes of import, the goods have been classified as Freely importable

items, and Negative items. The negative list is fur ther categorized as (a) prohibited item,

(b) restr icted items, and (c) canalized items. Goods falling under Freely importable

category can be impor ted by all, while items under restricted category can be imported

with a license. Items falling under prohibited category cannot be imported at all.

Canalized items can be imported only by Agencies approved by Government authorizing

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import of such canalized items. The import of goods is contr olled by Government of

India through Import Trade Control Regulations.

The Non Fund Based Credit Facility is in the form of Letters of Credit. It contains an

undertaking by the bank to pay against presentation of prescribed documents conforming

to the terms and conditions stipulated in the Letter of Credit. Since the Bank relies on

goods being imported under Letter of Credit as a security for payment of r elative bill, the

marketability of such goods, taking into account the licensing conditions, should also be

considered. The import licenses are issued in two copies :-

Customer Copy is for the purpose of clearing the impor ted goods through

customs, and

Exchange Control Copy is to facilitate remittance of foreign exchange onrespect of relative impor t bill.

The remittance in respect of an import bill must not exceed the CIF value ( Cost,

Insurance, Freight ) covered by Exchange Control Copy of Import License. If the import

bill is drawn on FOB ( Free on Board ) or C & F ( Cost and Freight ), the amount of

Insurance and Freight or Insurance, as the case may, be marked off in the value of license

and only the balance would be available for pur pose of remittance.

The Fund based I mport Finance generally takes the for m of a back up limit to the Letter

of Credit limit sanctioned to a customer. Such limits are considered where import of

goods is made in Economic Order Quantities for use in production over a per iod of time.

However, in the normal course, whenever an import Letter of Credit is considered, it

should be ensured that the importer will have sufficient cash flow available to retire the

bills presented under the Letter of Credit, promptly. If that is not ensured, the Bank would

be forced to fund the transaction after crystallizing the for eign exchange liability.

Importer Exporter Code Number

The importer must possess an Importer-Exporter Code Number allotted

by Director General of Foreign Trade. Customs authorities will not allow any person to

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import or export goods into or from India unless he holds a valid IEC number. The

following categories of organizations are exempted :

Ministr ies / Departments of Central and State Government

Import / Export for personal use not connected with trade / manufacturing /

agr iculture

CIF value of single consignment not exceeding Rs.25,000 /-

Indo-Myanmar border trades for CIF value of single consignment under Barter

Trade agreement not exceeding US $ 1000.

Categories of I mporters :

Importers are broadly classified as under :

1. Actual user impor ter

2. Stock and sale importer3. Private importer

For the purpose of licensing, importers are divided into the following broad categories :

IMPORTERS

Actual User Exporters holding

registration cum

membership (RCMC)

1. Industrial 1. Manufacturer

( AU[I] ) Exporter

2. Non- industrial 2. Merchant( AU[NI] ) Exporter

Actual User means an importer who utilizes the imported goods for himself, may be

industr ial or non- industr ial.

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Actual user ( Industrial ) means a person who utilizes the impor ted goods for

manufactur ing in his own Industrial unit or manufacturing for his own use in other

Industrial unit including a jobbing unit.

Actual user ( Non- industr ial ) means a person who utilizes the impor ted goods for his

own use in :

Any commercial establishment carrying on any business, trade or profession; or

Any labor ator y, Scientific or Research and Development Institution or other

Educational Institution; or

Any service industry ( includes an individual, firm, society, company,

cor poration, or any other legal person ).

Registr ation cum Membership Certificate (RCMC) means a certificate issued by any

Export Promotion Council, Commodity Board or other registering author ity designated

by Government for the purposes of export promotion. For Export Houses, Trading

Houses, RCMC will be issued by Federation of Indian Export Organisations (FIEO).

Manufacturer Exporter means a person who manufactures goods and exports or intends

to export such goods.

Merchant Exporter means a person engaged in trading activity and exporting or intends

to export such goods.

Time limit for settlement of Impor t Payments :-

In ter ms of the extant rules, remittances against imports should be completed not

later than 6 months from the date of shipment except in cases where amounts are with

held towards guarantee / per for mance etc. Authorized dealers may make remittances of

amounts so withheld, provided the earlier remittance had been made through them. No

payment of interest per missible on such withheld amounts. Accordingly, deferred

payment arrangements involving payments beyond a period of 6 months from the date of

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shipment up to 3 years are tr eated as external commercial borrowings which require pr ior

approval of the authorized dealer branches.

Interest on Import Bills

Authorized dealers may allow payment of interest on usance bills or overdue

interest for a period of less than 3 years from the date of shipment. All in cost per annum

payable for the credit not to exceed LIBOR + 50 basis points for credit up to 1 year and

LIBOR + 125 basis points for credit for periods beyond 1 year but less than 3 years for

the currency of credit.

Import of Foreign Exchange

A person may

Send into India without limit foreign exchange in any form other than currency

notes, bank notes, and travelers cheques ;

Bring into India from any place outside India without limit for eign exchange (

other than unissued notes ).

Letters of Credit

A letter of credit is an arrangement whereby a bank acting at the request of a

customer, undertakes to pay a third party by a given date, on documents being presented

in compliance with the conditions laid down. Letters of credit is also known as

Documentar y credits.

Parties to a letter of credit.

A letter of credit transaction nor mally involves the following parties :

1. Applicant / opener The buyer of the goods ( Importer ) who has to make

payment to an overseas supplier.

2. Issuing Bank The bank which issues the credit and undertakes to make the

payment on behalf of the applicant as per terms of the letter of credit.

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3. Beneficiary The seller of the goods (exporter) who obtains payment on

presentation of documents complying with the terms and conditions of the letter

of credit.

4. Advising Bank Banks which advises the letter of credit certifying its

authenticity to the beneficiary and is generally a bank oper ation in the countr y of

the beneficiar y.

5. Confirming Bank A bank which adds its guarantee to the letter of credit opened

by another bank and thereby undertakes responsibility for payment / acceptance /

negotiation / incurr ing deferred payment under the credit in addition to that of the

Issuing bank. It is nor mally a bank oper ating in the country of the beneficiary and

hence its guarantee adds to the acceptability of the letter of credit to the

benef iciary.6. Nominated Bank Bank specifically author ized by the issuing bank to make

payment etc. under the letter of credit.

7. Reimbursing Bank Bank authorized to honour the reimbursement claim made

by the paying, accepting or negotiating bank. It is normally the bank with which

issuing bank has account from which the payment is to be made.

8. Transferring Bank In a transferable letter of credit the first benef iciary may

request the bank author ized to pay, incur a deferred payment undertaking, accept

or negotiate, to transfer the letter of credit in favour of second beneficiary. Such a

bank is called transferr ing bank. In the case of a freely negotiable credit, the bank

specifically authorized in the letter of credit as a transferr ing bank, can transfer

the letter of credit.

Types of letters of credit :-

1. Revocable letter of credit.

A revocable letter of credit is one which can be cancelled or amended by the

issuing bank at any time and without prior notice to or consent of the beneficiary.

2. Irrevocable letter of credit

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An irrevocable letter of credit is one which cannot be cancelled or amended

without the consent of all parties concerned.

3. Revolving letter of credit

A revolving letter of credit is one where, under the terms and conditions

thereof, the amount is renewed or reinstated without specific amendments to the

credit being needed.

4. Transferable letter of credit

A transferable credit is one that can be transferred by the or iginal ( first)

benef iciary to one or more second beneficiaries. When the sellers of goods are not

the actual suppliers or manufacturers, but are dealers / middlemen, such credits

may be opened, giving the sellers the right to instruct the advising bank to make

the credit available in whole or in part to one or more other beneficiary (ies).5. Back to back letter of credit

When a middlemen enters into a contract to supply goods to be obtained from

other supplier s but is unwilling to disclose the identity of the buyer and the buyer

also is unwilling to open a transferable letter of credit. Actual manufacturer

supplier insists on payment against documents but the beneficiary of first credit is

shor t of funds, such back to back credits are opened. The benef iciary of the

original letter of credit will become the applicant for the second set of letter of

credit (back to back letter of credit).

6. Red clause letter of credit

Such letters of credit contain a clause w hich enables the beneficiary to avail of

an advance befor e effecting shipment to the extent stated in the letter of credit.

The clause used to be printed in red, hence the letter of credit is called Red Clause

letter of credit.

7. Green clause letter of credit

This is an extension of Red clause letter of letter, in that it provides for

advance not only for purchase of raw mater ials, processing and / or packing but

also for warehousing & insurance charges at the port pending availability of

shipping space.

8. Payment letter of credit

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Payment credit is a sight credit which is available for payment at sight basis

against presentation of requisite documents to the designated paying bank.

9. Deferred payment letter of credit

Deferred payment credit is an usance credit where, payment will be made by

designated bank, on respective due dates, determined in accordance with the

stipulations of th credit, without the drawing of Bill of Exchange.

10. Acceptance letter of credit

Acceptance credit is similar to deferred payment credit except for the fact that

in this credit drawing of a usance Bill of Exchange is a must.

11. Negotiation letter of credit

Negotiation credit can be a sight credit or a usance credit. A Bill of Exchange

is usually drawn in negotiation credit. In a negotiation credit, the negotiation canbe restricted to a specific bank or it may allow free negotiation, in which case it is

called as Freely Negotiable Credit w hereby any bank who is willing to negotiate

can do so.

12. Confirmed letter of credit

Confirmed letter of credit is a letter of credit to which another bank (bank

other than the issuing bank) has added its confirmation. This is to say, in a

confir med letter of credit, the beneficiary will have a fir m undertaking of not only

the issuing the credit, but also of confirming bank.

13. Standby credit

Standby credit is a documentar y credit or similar arrangement however named

or described which represents an obligation to the beneficiary on the part of the

issuing bank to make payment on account of any indebtedness undertaken by the

applicant, money borrowed or for any default by the applicant in the perfor mance

of an obligation.

Overdue Impor t Bills

If the import bills are not retired by the applicant, branches have to crystallize the

Foreign Currency amount into Rupee liability on the 10 day after the date of receipt ofth

documents in the case of demand bills and on the due date in the case of usance bills. If

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the 10 day or due date happens to be a holiday / Saturday, crystallization shall be doneth

on the next working day.

Cancellation of letter of credit due to frustration of contract :-

Normally letters of credit issued by the banks are irrevocable letters of credit

which contain a firm understanding on our part and cannot be cancelled or amended

without the consent of the parties to letter of credit, particularly the beneficiary. If the

applicant approached the bank for cancellation of the letter of credit, bank has to fir st

give notice to the beneficiary through the advising bank about revocation of letter of

credit and obtain consent for cancellation. The original letter of credit has to be obtained

back for cancellation. Alternatively authenticated message from advising bank to the

effect that beneficiarys consent has been obtained and or iginal letter of credit held bythem duly cancelled is to be received by issuing branch. After obtaining consent of

benef iciary, reimbursement authority given to the reimbursing bank has to be revoked.

Export Trade

Exports from India should strictly conform to EXIM policy and exchange contr ol

regulations. Every exporter has to apply for and obtain an I mporter Exporter code

number. Application for I mporter Exporter Code number shall be made to the Regional

Licensing Authority of the Director General of Foreign Trade ( DGFT ). Goods exported

must be those which can be exported freely or those under allocable quotas or those

covered by specific expor t licenses, in keeping with the Export Import Policy in force.

Exports may be made under Export Promotion Capital Goods ( EPCG ) Scheme which

facilitates prior import of capital goods, subject to expor t obligation to be fulfilled over a

per iod of time.

Goods exported must be those, which can be expor ted freely or those under

allocable quotas or those covered by specific export licenses. Export invoices have to be

denominated and realized in freely convertible currencies. Deemed exports refer to

supply of goods within India to specified categories by main / sub contr actors of goods

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Company and other General I nsurance companies will not be recoverable from overseas

buyers.

Pre-shipment means any loan or advance granted or any other credit provided by a bank

to an exporter for financing the purchases, processing, manufacturing or packing of goods

prior to shipment, on the basis of letter of credit opened in his favour or in favour of some

other person, by an overseas buyer or a confirmed and irrevocable order for the export of

goods from I ndia or any other evidence of an order for expor t from India having been

placed on the exporter or some other person, unless lodgment of export orders or letter of

credit with the bank has specifically been waived by Reserve Bank of India. Financial

assistance extended up to the time of shipping the goods is called Pre-shipment advance,

which is controlled in the books under the head Packing credit .Packing Credit is an advance granted to an exporter or a sub-supplier for financing the

procurement of raw mater ials, processing, manufactur ing, packing, transporting,

warehousing and shipping of goods meant for export. Packing Credit is generally granted

to an exporter who has an export or der or Letter of Credit in his own name and will

actually export the goods. However, Packing Credit can also be granted to supporting

manufactur ers or suppliers of goods who do not have export or ders or Letters of Credit in

their own names but are exporting through merchant exporters or export houses. The

advance is granted against pledge or hypothecation of stocks to be processed / produced

to execute the export order.

Packing Credit contract or Letter of Credit wise loan (Rupee) account :-

1. The packing credit loan is normally given contract wise, where a separate

account is maintained for each contract.

2. When disbursement is made in stages depending upon the need of the exporter, a

schedule of disbursement may be called for before granting the advance.

3. The relative expor t order or Letter of Credit in original against which the advance

is granted should invariably be endor sed on the reverse giving reference number,

under which the advance is granted, amount of advance etc., and should be

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iii. Undrawn balance remittance relating to any other ear lier shipments.

iv. Rupee payment received from the merchant exporter confirming shipment of

goods with details of export or der or letter of credit duly certified by the banker of

the merchant exporters.

v. Receipt of Foreign currency from foreigners during their visit to India evidencing

sale of goods or receipt of foreign currency by the expor ter during his foreign visit

towards sale of goods / advance payment for export.

vi. Duty draw back received from Government agencies may also be per mitted to be

credited to packing credit.

vii. Exporters may be permitted to repay packing credit advances from balances held

in their EEFC account to the extent exports have actually taken place.

viii. Exporters may be permitted to repay packing credit advances from balances heldin their EEFC account to the extent exports have actually taken place.

The exporters have an option

To avail export finance at pre-shipment stage in rupees and then post shipment

credit either in rupees or in for eign currency.

To avail pre-shipment credit in foreign currency and discount the export bills in

foreign currency at post shipment stage.

With a view to making credit available to exporters at internationally competitive rates,

authorized dealers have been permitted to extend Pre-shipment Credit in Foreign

Currency (PCFC) to exporters for domestic and imported inputs of exported goods at

LIBOR / EURO LIBOR / EURIBOR related interest rate.

Currency of Credit :-

Reserve Bank of India has per mitted granting of pre-shipment credit in any of the

convertible currencies. However, for the present Pre-shipment Credit in For eign Currency

is being granted in US Dollars, Sterling Pounds ( GBP), and EURO subject to availability

of funds.

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Pre-shipment Credit in Foreign Currency (PCFC) can be extended in one convertible

currency in respect of an export order invoiced in another convertible currency at the risk

and cost of cross currency transaction to the exporter.

Sharing of Pre-shipment Credit in Foreign Currency between Merchant Exporter and

Manufacturer :-

1. The rupee export packing credit is allowed to be shared between an Export Order

Holder (EOH) and the manufacturer of the goods to be exported. Branches may

extend Pre-shipment Credit in Foreign Currency also to the manufacturer on the

basis of the disclaimer from the export order holder through his bank. PCFCgranted to the manufacturer can be repaid by transfer of foreign currency from the

export order holder by availing of Pre-shipment Credit in Foreign Currency or by

discounting of bills. It should be ensured that no double financing is involved in

the transaction and the total period of Pre-shipment Credit is limited to the actual

cycle of production of the exported goods.

2. The facility may be extended where the banker or the leader of consortium of

banks is the same for both the export order holder and the manufacturer or, the

banks concerned agree to such an agreement where the bankers are different for

export order holder and manufacturer. The sharing of export benefits will be left

to the mutual agreement between the export order holder and the manufacturer.

Discounting Foreign Bills in Foreign Currency :-

1. The facility of Pre-shipment Credit in Foreign Currency will be self-liquidating in

nature. Generally, the Pre-shipment Credit in Foreign Currency should be

liquidated out of proceeds of export documents or submission for discounting /

rediscounting under the EBR scheme.

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2. Any surplus amount available, (net of EEFC, if any) after full adjustment of

PCFC including interest, should be credited to the customers account at T.T

buying rate / for ward rate.

3. Shortfall if any, in the deliver y of for eign currency on discount of bills should be

recovered at T.T selling rate.

4. PCFC cannot be treated as a loan to be repaid in or der to avail of post-shipment

credit separately.

5. The PCFC should not be liquidated with foreign exchange acquired from other

sources, except balances held in EEFC account of the expor ter, to the extent of

exports already made.

[ Note :- If export takes place and the expor ter does not wish to avail post

shipment credit for adjustment of pre-shipment advance and requests forliquidation of the same by debiting his current account or EEFC account, his

request can be acceded to for adjustment of PC to the extent of shipment made

and handle export documents on collection basis. No penal rate of interest to be

levied for such liquidation. Sale of foreign currency for adjustment of PCFC in

such cases is allowed. ]

6. Pre-shipment Credit in Foreign Currency can also be liquidated out of rupee

resources of the exporter to the extent of exports have already taken place.

Export Letters of Credit :-

Branches are required to check the Letter of Credit for their authenticity and ensure

that the terms of the credit are not in violation of any exchange control regulations.

Further the terms of the credit should not contradict with one another and should contain

precise and unambiguous instructions. The following points are also to be ver ified :-

1. At times the Letter of Credit is made available for negotiation at the counter s of

the Letter of Credit opening bank at a for eign centre. It means that the Letter of

Credit issuing bank would be liable to pay only if documents are drawn in

conformity with the terms of Letter of credit and reach its counter s befor e the time

limit stipulated which the negotiating bank cannot guarantee.

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2. Some Letters of credit are initially provisional i.e., they become oper ative after the

occurrence of an event, such as, issue of import license to the applicant or after

receipt of aid or credit from development agencies like Asian Development Bank,

Wor ld Bank etc. Such Letters of Credit are purely provisional in nature and

become operative only after the receipt of the specific amendment from the

opening bank to that effect.

Advising Letters of Credit :-

In International trade, Letters of Credit are normally advised through banks oper ating in

the beneficiarys countr y. If the beneficiary receives the Letter of credit directly, he will

not be able to establish its authenticity.Letter of credit opening bank will utilize the services of their cor respondent bank, which

will establish apparent authenticity and hand over the letter of credit to the beneficiary.

Cancellation of letter of credit :-

1. When issuing bank seeks to cancel letter of credit before due date, obtain

benef iciarys concurrence for cancellation and obtain back the or iginal letter of

credit.

2. Call for and file away the original letters of credit under advice to opening bank

or return the same to opening bank duly cancelled under stamp and signature.

Post-shipment finance is an advance normally granted to an exporter of goods and

services after shipment from India, till the date of repatriation of the export proceeds. The

advance may be against shipping documents or on the security of duty drawback or

export related receivables from Gover nment of India.

Post-shipment finance is generally short-term working capital finance. However,

depending upon the credit ter ms e.g. deffered export, it can also grant for longer periods.

As a general rule in case of physical exports, post shipment finance is extended to the

actual exporter who has exported the goods or to an exporter in whose name the expor t

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documents are transferred. Post shipment finance is also granted for deemed exports in

which the goods do not leave the country and the proceeds for demand expor ts are

received by the supplier in India itself.

Types of Post-shipment Finance :-

Post-shipment finance is granted under the following heads.

1. Negotiation by payment / acceptance of export bill drawn under a Letter of Credit.

The negotiating bank will be entitled for reimbursement of the bill

amount paid by it under the Letter of Credit, only if the bill negotiated strictly

conforms to the terms and Conditions of Letter of Credit.

2. Purchase / Discount of export bills drawn under confirmed contract / orders.

In respect of bills drawn under these arrangements, the bank has to look

primarily to the drawer customer for repayment of advance in the event of non

payment of bills, since re-impor t of relative exported goods ( if these goods are

lying uncleared at destination ) is quite expensive and the ultimate sale proceeds

in all probability would be disproportionately small in relation of the bill amount.

3. Advance against export bills sent for collection

At times, the expor ter might have fully utilized his bills limit and in

certain cases the bills drawn under letter of credit may have some discrepancies.

In such cases the bills will be sent on collection basis. I n some cases, the exporter

himself may request for sending the bills on collection basis anticipating the

strengthening of the for eign currency. Bank may allow advance against these

collection bills to an exporter.

Concessive rate of interest can be charged for this advance up to the transit

per iod in the case of DP bill and transit period + usance period + grace period (if

any) in the case of Usance bills. Beyond this period, the interest rate will be

subject to the var ious rates prescribed by Reserve Bank of India depending upon

the usance of the bill.

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4. Advance against export / goods sent on consignment basis.

Occasionally, goods exported are not on the basis of confirmed sale

contract / order, but only to be held at the destination by the other party (

consignee ) at the risk and responsibility of the exporter until they are sold. The

consignee at the destination can be an Agent of the exporter or exporters other

Branch / Office.

5. Advance against undrawn balance receivable.

Certain type of goods exported involve test / analysis at the point of

shipment and also at destination and allowance is required to be made, if the

quality / weight of goods ( eg. Oil seeds extraction ) is found to be lower than the

stipulations. To cover possibility of such allowances, the exporter is required to

draw bills only to the extent of certain percentage of the invoice value, leaving the balance to be settled on the basis of test / analysis at the destination of goods.

Such undrawn balance is usually a small percentages, say 5 % to 10 % of invoice

value as may be per mitted by Exchange Control at the relevant time.

Period and Notional Due Date :-

As per FEDAI guidelines, if export bills drawn in foreign currency are at sight or on

demand basis concessive rate of interest is applicable for the Normal Transit Per iod

(NTP) i.e., presently 25 days. In case of usance bills, concessional rate of interest as

directed by the Reser ve Bank of India on export bills is applicable for the nor mal transit

per iod plus usance per iod e.g. A foreign currency bill payable at 60 days after sight will

be eligible for concessional interest rate for 60 days usance plus the normal transit per iod

of 25 days i.e., a total number of 85 days.

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Fixed Due Date :-

In case of export usance bills ( foreign currency and rupee bills) where due dates are

reckoned from date of shipment or date of bill of exchange etc., no normal transit per iod

shall be applicable, since the actual due date is known.

Export Credit and Guarantee Cor poration of India Limited (ECGC) :

The Whole Turnover Guarantee Schemes were introduced for providing cover to

the both packing credit advances and post shipment advances granted by all our branches

throughout India, in respect of losses which may be incurred while granting such

advances. The Guarantee cover provided by the Corporation covers the losses incurred by

bank while granting such advance to exporters on following counts :Insolvency of the exporter

Protracted default by the exporter to pay the amounts due to the bank.

The Whole Turnover Guarantees (WTPCG and WTPSG) does not cover packing credit

advances granted to follow ing clients :

Public Sector Undertakings wholly owned by Government of India

Packing credit advances for expor ts on deferred payment terms, and export of

construction and ser vices.

(Advances for the above category of borrowers will be covered by ECGC on specific

application being made under Individual Packing Credit Guarantee scheme).

The transport documents that are normally tendered by the exporters are :

1. Bill of Lading (BL)

The Bill of Lading, issued by shipping company, is a document of title to

goods. Bill of Lading is normally issued in mor e than one original and delivery of

goods can be taken on any single original negotiable copy. The date of shipment

shown in the bill of lading should not be later than the date stipulated in the letter

of credit as last date for shipment. The date on which the goods are placed on

Board is treated as the actual date of shipment. Bill of Lading should clear ly

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indicate Freight Paid or Freight Payable at destination as the case may be. If

the value of goods as per letter of credit is Cost, Insurance, and Freight (CIF) or

Cost and Freight (C&F), bill of lading must show Freight Paid, and if on Free on

Board basis, it must show Freight Payable at destination.

2. Airway Bill (AWB)

Airway Bill is an acknowledgement issued by an Airline company or their

authorized agents (and not forwarding agents) stating that they have received the

goods detailed therein (number of packages, quantity and nature of goods) for

dispatch by Air to the named consignee at the address stated therein. Unlike a bill

of lading, Airway bill is not a document of title to goods because it is merely an

acknowledgement of goods. When it is not a title to goods, naturally it is not a

negotiable document.

Air Consignment Note :-

It is otherwise called as Air Receipt. This is issued generally by for warding

agents. This document shows the departure and the destination stations as well as

the name of the shipper and the addressee. It must also indicate for warding station

and date stamp. This document also gives the description of goods etc., and their

apparent good or der and condition.

3. Post Parcel Receipt (PPR)

As the name indicates, it is a receipt issued by postal author ities. It can be a Sea

Mail receipt or Airmail receipt depending upon the mode by which they are sent.

Postal receipt is also an acknowledgement of receipt of goods for delivery to a

named consignee hence, it is not a document of title to goods nor is it a negotiable

instruments. Though the postal receipt is not a must for taking deliver y of goods

in certain countries, receipt must be shown to the customs and postal authorities

for clearance and delivery postal regulations in certain countr ies allow senders to

issue and authenticate their own certificates of posting. Considering all these, it is

not considered a safe document from the bankers point of view.

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Negotiation of Export bills drawn under irrevocable letter of credit :-

When an overseas bank opens a letter of credit at the instance of its customer in

favour of an exporter for import of goods, it irrevocably commits itself to honour the

drawing of the exporter, subject to the condition that all the terms stipulated in the letter

of credit are complied with. Exporters from India are governed by the trade control and

the FEMA guidelines. Therefore the bank, which negotiates a bill drawn under a letter of

credit, has to ensure strict compliance not only with the terms and conditions of the letter

of credit but also that there is no violation of the above- mentioned regulations. This also

applies to cases where export bills have been purchased without the backing of a letter of

credit or are taken for collection only.

Escrow accounts :-

Escrow accounts is a mechanism for settlement of payment for imports into India and for

exports from India under counter trade arrangements entered into between Indian

parties and their overseas counterparts. Counter trade means any arrangement under

which exports / imports from / into India are balanced either by direct import / export

from the

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