Sure Success Series Bank Financial Management ( For CAIIB .
Sure Success SeriesBankFinancial Management( For CAIIB Examination)3rd EditionSure Success Series- CAIIB- Bank Financial Management -Vaibhav AwasthiBy: Vaibhav AwasthiPage 1
The content of this book has been developed keeping in view courseware forthe Second paper of Bank Financial Management of CAIIB.An attempt has been made to cover fully the syllabus prescribed for eachmodule/subject and the presentation of topics may not always be in the samesequence as given in the syllabus. Candidates are also expected to take note ofall the latest developments relating to the subjects covered in the syllabus byreferring to RBI circulars, financial papers, economic journals, latest books andpublications in the subjects concerned.Although due care has been taken in publishing this study material, yet thepossibility of errors, omissions and/or discrepancies cannot be ruled out.We welcome suggestion for improving the book and its contents. You may writeback to us at jaiibcaiibadmission@gmail.comAbout the Author:Vaibhav Awasthi,is a professional banker and has experience of 11 yearsin Banking. He has done his graduation from Kanpur University and MBA(Finance) from Delhi. He also holds the distinction of being part of maidenbatch of “Certified Banking Compliance Professional” conducted by IIBF& ICSI.He has been mentoring students for JAIIB/CAIIB since last 8 years andpresently works as Senior Manager with a leading Public Sector Bank. Hecan be reached at Vaibhav.awasthi16@gmail.comAll rights reserved. No part of this publication may be reproduced or transmitted, in any form or byany means, without permission. Any person who does any unauthorized act in relation to thispublication may be liable to criminal proceedings and civil claim for damages.This book is meant for educational and learning purpose. The author of this book has taken all reasonable care to ensure that thecontents of the book do not violate any existing copyright or other intellectual property rights of any person in any mannerwhatsoever.Sure Success Series- CAIIB- Bank Financial Management -Vaibhav AwasthiPage 2
To the thought“We all live under the same sky, but we all don't have the same horizon”Sure Success Series- CAIIB- Bank Financial Management -Vaibhav AwasthiPage 3
PrefaceDear Students,Bank Financial Management is the second paper of CAIIB exam. Typically this is consideredas the toughest paper amongst all the three paper of CAIIB because of the numerical portionwhich often occupy as much as 60% of the question paper.The subject is divided into four module and questions are evenly asked from all the modules.Thus while preparing students must not ignore any module.Having said that, Module B, C & D are inter related and having understanding of one moduleis necessary for progressing to another.Aim of BFM subject is to enable student to have high level of understanding of how banksoperate on Macro level, how funds are managed, how capital is arranged and managed andhow treasury operates and helps the bank in making profits.When students take up this subject, they are worried about the numerical and how they willsolve it. We assure you that numerical asked in BFM are of very basic nature and littleunderstanding will make sure that you not only crack but enjoy the numerical part.The book has been written based on our experience about prior year question papers. Wehave tried to keep the book concise and most relevant by explaining all the important points’chapter wise along with case studies and numerical.The aim of our Sure Success Series- is to make sure that students are able to finish thecourse in minimum possible time.To boost their preparation students may stay in touch with us by visiting our websitewww.jaiibcaiib.co.in. They can also join us on facebook for regular updates and questionsWe wish you all the best for your exams.Sure Success Series- CAIIB- Bank Financial Management -Vaibhav AwasthiPage 4
Module AInternational BankingWhat to Focus in this moduleModule A is based on Foreign exchange. Students are expected to knowvarious facilities available to NRIs, various kinds of deposits like NRE, NRO,FCNR along with details of foreign exchange which can be remitted.Another important area to be focussed is foreign trade and role of LC in it.Students should understand in deep, concept of LC and various articlesgoverning itForeign trade means export and import. Export requires funds which aregranted in the form of pre shipment and post shipment finance. Students shouldunderstand various financial facilities like PCFC, PSFC, etc. which can begiven. Import involves giving away of valuable foreign exchange. There arevarious guidelines on release of funds and how to monitor it. Students shouldbe aware of it.Finally Forex numerical. They essentially require calculation of correct rate tobe quoted to export and import customer for various kind of transactionsspot/forward. We have covered various types of numerical calculation to givestudent a clear picture of how to calculate the various rates.Sure Success Series- CAIIB- Bank Financial Management -Vaibhav AwasthiPage 5
Unit-1 Exchange Rates and Forex BusinessForeign Exchange Management Act (FEMA), 1999, (Section 2) defines foreign exchange as:"Foreign Exchange means foreign currency, and includes:(i) All deposits, credits and balances payable in foreign currency, and any drafts, traveler'scheques, letters of credit and bills of exchange, expressed or drawn in Indian currency andpayable in any foreign currency,(ii) Any instrument payable at the option of the drawee or holder, thereof or any other partythereto, either in Indian currency or in foreign currency, or partly in one and partly in the other."Thus, broadly speaking, foreign exchange is all claims payable abroad, whether consistingfunds held in foreign currency with banks abroad or bills, checks payable abroad.Major participants of forex markets are:(i) Central Banks(ii) Commercial Banks(iii) Investment Funds/Banks(iv) Forex Brokers(v) Corporations(vi) IndividualsMajor Factors which affect exchange rates are:(1) Fundamental reasons- relate to general economic condition and include balance ofpayment, interest rates, economic growth, political conditions etc.(2) Technical reasons: Capital moves from low yielding currency to high yielding currency(3) SpeculationExchange rate mechanism: The delivery of FX deals can be settled in one or more of thefollowing ways:Ready or Cash: Settlement of funds takes place on the same day (date of deal),Tom: Settlement of funds takes place on the next working day of the date of dealSpot: Settlement of funds takes place on the second working day after/following the date ofContract/deal.Forward Delivery of funds takes place on any day after Spot date.Forward rate Spot rate Premium (or - Discount).If the value of the currency is more than that being quoted for Spot, then it is said to be at aPremium, while if the currency is cheaper at a later date than spot, than it is called at aDiscountThe forward price of a currency against another can be worked out with the following factors:(i) Spot price of the currencies involved.(ii) The interest rate differentials for the currencies.(iii) The term, i.e., the future period for which the price is worked outSure Success Series- CAIIB- Bank Financial Management -Vaibhav AwasthiPage 6
Direct and Indirect QuotesIn direct quotes, the local currency is variable, say as in India, 1 USD Rs 48.10. The ratesare called direct, as the rupee cost of foreign currency is known directly. These quotes are alsocalled Home Currency or Price Quotations. On the other hand, under indirect method, the localcurrency remains fixed, while the number of units of foreign currency varies. For example, Rs100 2.05 USDCross Rates When we deal in a market where rates for a particular currency pair are notdirectly available, the price for the said currency pair is then obtained indirectly with the help ofcross rate mechanismFixed vs. Floating RatesThe fixed exchange rate is the official rate set by the monetary authorities for one or morecurrencies. It is usually pegged to one or more currencies. Under floating exchange rate, thevalue of the currency is decided by supply and demand factors for a particular currencyBid and Offered RatesThe buying rates and selling rates are also referred to as bid and offered ratesRBI/FEDAI GUIDELINESAuthorised Person - Category I: Authorised Dealer Banks, Financial Institutions, and otherentities allowed to handle all types of foreign exchange transactions. (Earlier known asAuthorised dealers).Authorised Person - Category II: Money changers, allowed to undertake sale/purchase offoreign currency notes, travellers cheques, as also handle foreign exchange transactionsrelating to remittance facilities allowed to residents, like Travel abroad, studies abroad, medicalneeds, gifts, donations, etc. (Earlier known as Full fledged Money Changers-FFMCs).Authorised Person - Category III: Entities allowed to undertake only purchase of foreigncurrency notes and traveller's cheques, (Earlier these entities known as Restricted MoneyChangers-RMCs)Foreign Exchange Dealers Association of India. FEDAl, is a non-profit making body,formed in 1958 with the approval of Reserve Bank of India, consisting of Authorised dealers asmembers.FEDAI Guidelines relating to Forex business:1. All export bills to be allowed standard transit period.2. Export bills drawn in foreign currency, purchased/discounted/negotiated, must becrystallized into rupee liability, in case of delay in realization of export bills. The same would bedone at TT selling rate. The prescription of crystallisation of export bills on the 30 th day fromthe due date /notional due date, has since been relaxed for bank's to decide on the days forcrystallisation on their own , based on nature of commodity, country of export etc. Thecrystallisation period can vary from bank to bank, customers to customers, etc, but cannotexceed 60 days.Sure Success Series- CAIIB- Bank Financial Management -Vaibhav AwasthiPage 7
Unit 2 Basics of Forex DerivativesTypes of Risks in foreign business are given as under:(1) Exchange Risk: Exchange risk means risk on account of adverse movement in priceswhich affects your position. There can be two position overbought and oversold. Understandthrough an example. A merchant buys 100 dollars @ Rs 50 but is able to sell only 60 at theend of the day. He has 40 dollars which he has not been able to sell. This is overboughtposition. Now let’s say price of dollar next day is Rs 49 only. This means he faces loss of Rs 1on each 40 dollar. This is exchange riskAnother case can be a deal buys 100 dollars but enters into a contract to sell 120 dollars. Herehis position is oversold.Foreign exchange exposure has been classified into:(i) Transaction Exposure: Arising due to normal business operations consequent to which thevalue of transactions will be affected. This is affected by the transactions undertaken whichmay expose the company/firm to currency risk, when compared to the value in home currency.(ii) Translation Exposure: This arises when firms have to revalue their assets and liabilities orreceivables and payables in home currency, at the end of each accounting period. Also arisesdue to consolidating the accounts of all foreign operations. These are not actual costs or gains,but notional, as the actual loss or gain is booked at the time of actual translation of theexposure.(iii) Operating Exposure: This affects the bottom-line of the firm /company, not directly due toany foreign exchange exposure of the firm /company, but due to other external factors in themarket/ economy, like changes in competition, reduction in import duty increasing competitionfrom imported goods, reduction in prices by other country exporters- effecting exports,increase in import duty by other country -trade tariff, etc.- causing reduction in exports, etc.(2) Settlement Risk: When one party of trade fails to performs its part due to difference in time iscalled settlement risk(3) Liquidity Risk: when one party is unable to meet its funding requirement(4)Country Risk /Sovereign Risk:(5) Interest Rate Risk(6) Operational Risk(7) Legal RiskRBI has issued Internal Control Guidelines (ICG) for foreign exchange business, Under ICG,banks are required to put in place various dealing limits for their forex operations, which can bebriefly summarized as under:(i) Ovenight limit: Maximum amount of open position or exposure, a bank can keep ovenight,when markets in its time zone are closed. Open position means overbought or oversoldposition(ii) Daylight limit: Maximum amount of open position or exposure, the bank can expose itselfat any time during the day, to meet customers' needs or for its trading operations.(iii)Gap limits: Maximum interperiod/month exposures which a bank can keep, are called gaplimits.Sure Success Series- CAIIB- Bank Financial Management -Vaibhav AwasthiPage 8
(iv) Counter party limit: Maximum amount that a bank can expose itself to a particular counterparty.(v) Country risk: Maximum exposure on a single country.(vi) Dealer limits: Maximum amount a dealer can keep exposure during the operating hours.(vii) Stop loss limit: Maximum movement of rates against the position held, so as to triggerthe limit - or say maximum loss limit for adverse movement of rates.(viii) Settlement risk: Maximum amount of exposure to any entity, maturing on a single day.(ix) Deal size limit: Highest amount for which a deal can be entered. The limits is fixed torestrict the operational risk on large deals.This is a sample Preview. All pages of the book not displayed.This is a sample preview. To purchase the complete Sure Success Series log on to ourwebsite www.jaiibcaiib.co.in. You can also call us on 07600273309 for any assistance.Unit 4- Documentary Letter of CreditIt is an instrument by which a bank undertakes to make payment to a seller on production ofdocuments stipulated in the credit (Refer to article 2 of UCPDC).Parties to LCsa: Applicant: - The Buyer or importer of the goods.b: Issuing bank: - Importer’s or buyer’s bank who lends its name or credit.c: Advising bank: - Issuing bank’s branch (or correspondent in exporter’s country)to whom the letter of credit is sent for onwards transmission to the seller orbeneficiary, after authentication of genuineness of the credit.d: Beneficiary :- The Party to whom the credit is addressed i.e. seller or supplier orexporter.e: Negotiating bank: - The Bank to whom the beneficiary presents his documentsfor negotiation or acceptance under the credit.f:Reimbursing bank: - Third bank which repays, settles or funds the negotiatingbank at the request of its principal, the issuing bank.g: Confirming bank: - The bank adding confirmation to the credit. Which undertakes the responsibility of payment by the issuing bank and on his failure to pay.Sure Success Series- CAIIB- Bank Financial Management -Vaibhav AwasthiPage 9
Operation of letter of credit1.Buyer and seller enter into a contract for sale of goods or providing of services.The transaction is Covered by L.C.2.On request of the buyer i.e. applicant, LC is issued by Opening Bank in favorsof Beneficiary and sent to advising bank instead of sending directly tobeneficiary.3.After authentication of LC, the advising bank sends the LC to beneficiary.4.After receiving LC, the beneficiary manufactures the goods and makesshipments and prepares documents as mentioned in LC.5.Documents are Presented by beneficiary to nominated bank for negotiation.Negotiating Bank makes payment against these documents and claimspayment on due date from opening bank.6.Opening bank makes payment to negotiating bank and recovers the paymentfrom applicant.TYPES OF LETTERS OF CREDITDocumentsagainst DP LCs or Sight LCs is those where the payment is made againstPayment LC or Sight documents on presentation.LC(DA Documents against acceptance)(DP Documents against payment)Documentsagainst DA LCs or Acceptance LCs is those, where the payment is madeacceptanceor on the maturity date in terms of the credit. The documents of title tousancegoods are delivered to applicant merely on acceptance of documentsfor payment.Deferred Payment LC It is similar to usance LC but there is no bill of exchange or draft. It ispayable on a future date if documents as per LC are submitted.Irrevocablerevocable creditsand The Issuing bank can amend or cancel the undertaking if thebeneficiary consents.A revocable credit is one that can be Cancelled or amended at anytime without the prior knowledge of the seller. If the negotiating bankmakes a payment to the seller prior to receiving notice to cancellationSure Success Series- CAIIB- Bank Financial Management -Vaibhav AwasthiPage 10
or amendment, the issuing bank must honor the liability.With or withoutWhere the beneficiary holds himself liable to the holder of the bill ifre-coursedishonoured, it is considered to be with-recourse. Where he doesnot hold himself liable, the credit is said to be without-recourse. Asper RBI directive dated Jan 23,2003 banks should not open LCs andpurchase / discount / negotiate bills beating the ‘without recourse’clause.Restricted LCsA restricted LC is one wherein a specified bank is designated to pay,accept or negotiate.Confirmed CreditsA credit to which the advising or other bank at the request of theissuing bank adds confirmation that payment will be made. Bysuch additions, the confirming bank steps into the shoes of theissuing bank and thus the confirming bank negotiatesdocuments if tendered by the beneficiary.Transferable CreditThe beneficiary is entitled to request the paying, accepting ornegotiating bank to make available in whole or part, the credit toone or more other parties (Article 48 of UCPDC). For partialtransfer to one or more second beneficiary/ies the Credit mustprovide for partial shipment. Transferable credit can betransferred only once.Bank to Bank CreditA back to back credit is one where an exporter received adocumentary credit opened by a buyer in his favour. He tendersthe same to the bank in his country as a cover for openinganother LC in favour of his local suppliers. The terms of suchcredit would be identical except that the price may be lower andvalidity earlier.Red Clause CreditA red clause credit also referred to a packing or anticipatorycredit has a clause permitting the correspondent bank in theexporter's country to grant advance to beneficiary at issuingbank's responsibility. These advances are adjusted fromproceeds of the bills negotiated.Green Clause CreditA green clause LC permits the advances for storage of goods ina warehouse in addition to pre-shipment advance.Sure Success Series- CAIIB- Bank Financial Management -Vaibhav AwasthiPage 11
This is a sample Preview. All pages of the book not displayed.This is a sample preview. To purchase the complete Sure Success Series log on to ourwebsite www.jaiibcaiib.co.in. You can also call us on 07600273309 for any assistance.ARTICLES OF UCPDC-600Article-1: UCPDC-600 applies to any LC when its text expressly indicates that it is subjectto these rules. The rules are binding on all parties thereto unless expressly modified orexcluded by the credit.Article-2: It contains important Definitions such as: Advising bank, Applicant, Bankingday, Beneficiary, Complying presentation, Confirmation, Confirming bank, Credit, Honour,Issuing bank, Negotiation, Nominated, Presentation and Presenter.Article-3 It contains Interpretations of various terms given as under: A credit is irrevocable even if there is no indication to that effect. Branches of a bank in different countries are separate banks. The expression "on or about" will be interpreted as an event to occur during a period of5 calendar days before until 5 calendar days after the specified date, both start andend dates included. The terms "first half' and "second half' of a month shall be construed r
Sure Success Series- CAIIB- Bank Financial Management -Vaibhav Awasthi Page 8 Types of Risks in foreign business are given as under: (1) Exchange Risk: Exchange risk means risk on account of adverse movement in prices which affects your position. There can be two positio
Northern Bank & Trust Co. Patriot Community Bank People's United Bank Pilgrim Bank Radius Bank RTN Federal Credit Union Santander StonehamBank TD Bank The Cooperative Bank The Savings Bank The Village Bank Walpole Cooperative Bank Wellesley Bank Winchester Co-operative Bank Abington Bank Bank of Canton Blue Hills Bank Boston Private Bank & Trust
M/s G.M. Kapadia & Co., Chartered Accountants Bankers HDFC Bank Ltd. (Primary Banker) Axis Bank Ltd. Bank of Baroda Bandhan Bank Ltd. Citibank N.A. CSB Bank Ltd. DCB Bank Ltd. Deutsche Bank ESAF Small Finance Bank ICICI Bank Ltd. IDFC Bank Ltd. Indian Bank RBL Bank Ltd. Saraswat Co-op Bank Ltd. State Bank of India Suryoday Small Finance Bank Ltd.
commerce bank eastern bank-east west bank everbank firstbank first hawaiian bank-first horizon bank firstmerit bank-first national of. nebraska first niagara flagstar bank f.n.b.corp. frost national bank fulton financial hancock bank iberiabank m b financial new york community banks old national, bank one west bank people's united bank raymond .
10. HDFC Bank Limited 11. ICICI Bank Ltd 12. Indian Overseas Bank 13. ING Vysya Bank 14. Kotak Bank -Virtual card 15. Shivalik Bank 16. Standard Chartered Bank 17. State Bank of Bikaner and Jaipur 18. State Bank of India 19. State Bank of Mysore 20. State Bank of Travencore 21. Syndicate Bank 22. The Federal Bank Ltd 23. The Karur Vysya Bank Ltd
State Bank of India State Bank of Mysore State Bank of Patiala State Bank of Travancore Syndicate Bank Tamilnadu Mercantile Bank TNSC Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank YES Bank . Instruction to follow during first time use of Karur Vysya
Access Bank Acleda Bank Agricultural Bank of China ANZ Arab International Bank Banco Sabadell Bank ABC Bank Alfalah Bank Islam Brunei Darussalam Bank of America Bank of Baroda Bank of China BankUnited Banorte Barclays BBVA Belsize BMCE Bank BMO Capital Markets BNL - BNP Paribas BNP Paribas BNY Mellon Bpifranc
Bank of Baroda. 31: Bank of Beirut (UK) Limited . 32: Bank of China. 33: Bank of Communications (UK) Limited. 34: Bank of Cyprus UK Limited. 35: Bank of East Asia Limited. 36: Bank of India. 37: Bank of Montreal . 38: Bank of New York Mellon (UK Group) 39: Bank of Nova Scotia, The . 40: Bank of Taiwan - Lon
Deka Bank Deutsche Girozentrale Deutsche Bank AG DNB Bank ASA DZ BANK AG Helaba (Landesbank Hessen-Thüringen) HSBC ICBC (London) plc ING Bank Intesa Sanpaolo Investec Bank plc KBC Bank KfW IPEX-Bank KommunalKredit Austria AG Landesbank Baden-Württemberg (LBBW) Macquarie Group mBank SA Mizuho Bank National Australia Bank National Bank of Abu Dhabi
