CU-MBA-SEM-IV-International Banking and Forex Second draft

 Berle, Adolf A. and Gardiner C. (1932) Means, The Modern Corporation and Private Property. New York: Macmillan,  Bernanke, Ben S. (1983), “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” American Economic Review 73 (June 1983).  Chen, Yenning, “Banking Panics: The Role of the First-Come, First-Served Rule and Information Externalities,” Journal of Political Economy, 107 (October 1999). Website  https://www.investopedia.com/s/optioninvestor/07/swaps.asp#:~:text=The%20Swaps %20Market%20Unlike%20most%20standardized%20options%20and,market%2C%2 0with%20few%20%28if%20any%29%20individuals%20ever%20participating.  https://r.search.yahoo.com/_ylt=Awr9Dt8OhQ5hZ1YAdhxXNyoA;_ylu=Y29sbwNnc TEEcG9zAzEEdnRpZANEMTA0NV8xBHNlYwNzcg--  https://r.search.yahoo.com/_ylt=Awr9Dt8OhQ5hZ1YAfhxXNyoA;_ylu=Y29sbwNnc TEEcG9zAzMEdnRpZANEMTA0NV8xBHNlYwNzcg-- 251 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 14 – INTERNATIONAL BANKING AND OTHER PARTS STRUCTURE 14.0 Learning Objectives 14.1 Introduction 14.2 Banking Services 14.3 Non-Banking Services 14.4 Comparison of International Banking 14.5 Importance of International Banking 14.6 Summary 14.7 Keywords 14.8 Learning Activity 14.9 Unit End Questions 14.10 References 14.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Illustrate the concept of Banking Services  Explain the concept of Non-Banking Services  Illustrate the concept of Importance of International Banking 14.1 INTRODUCTION The banking sector plays a vital role in the development of one country’s economy. The growth of banking sector depends upon the services provided by them to the customers in various aspects. The growing trend of banking services is found significant after the new economic reforms in India. Today, India has a fairly well-developed banking system with different classes of banks – public sector banks, foreign banks, private sector banks – both old and new generation, regional rural banks and co-operative banks with the Reserve Bank of India as the fountain Head of the system. Nowadays banking sector acts as a backbone of Indian economy which reflects as a supporter during the period of boom and recession. Today the banking industry has been experiencing a totally unexpected paradigm shift, and in this age of advanced technology and modern resources the bankers have to first properly 252 CU IDOL SELF LEARNING MATERIAL (SLM)

define what a new generation banks is as there is no definition that exists, that defines what a new generation bank/banking is and how they can be operated in a sustainable manner not just witnessing profit. But, witnessing existence on a long run for a better tomorrow. The Banking sector has been immensely benefited from the implementation of superior technology during the recent past, almost in every nation in the world. Productivity enhancement, innovative products, speedy transactions seamless transfer of funds, real time information system, and efficient risk management are some of the advantages derived through the technology. Information technology has also improved the efficiency and robustness of business processes across banking sector. India's banking sector has made rapid strides in reforming itself to the new competitive business environment. Indian banking industry is the midst of an IT revolution. Technological infrastructure has become an indispensable part of the reforms process in the banking system, with the gradual development of sophisticated instruments and innovations in market practices. IT in Banking Indian banking industry, today is in the midst of an IT revolution. A combination of regulatory and competitive reasons has led to increasing importance of total banking automation in the Indian Banking Industry. Financial innovation in India is key to making growth inclusive by connecting hundreds of millions to the banking system, said panellists at the World Economic Forum’s India Economic Summit. The deregulation of financial service industry and increased competition with in investment banking undoubtedly led to increased emphasis on the ability to design new products, develop better process, and implement more effective solution for increasingly complex financial problems. These financial innovations are a result of number of Government regulations, tax policies, globalization, liberalization, privatization, integration with the international financial market and increasing risk in the domestic financial market. Financial innovation is the process through which finance managers or intermediary institutions in financial markets add value to existing plain vanilla products that satisfy the user needs. According to John Finnerty, “Financial Innovation involves the design, the development, and the implementation of innovative financial instruments and processes, and the formulation of creative solutions to problems in finance”. The various innovations in banking and financial sector are ECS, RTGS, EFT, NEFT, ATM, Retail Banking, Debit & Credit cards, free advisory services, implementation of standing instructions of customers, payments of utility bills, fund transfers, internet banking, telephone banking, mobile banking, selling insurance products, issue of free cheque books, travel cheques and many more value- added services. Today, we are having a fairly well-developed banking system with different classes of banks – public sector banks, foreign banks, private sector banks, regional rural banks and co- operative banks. The Reserve Bank of India (RBI) is at the paramount of all the banks. The RBI’s most important goal is to maintain monetary stability (moderate and stable inflation) in India. The RBI uses monetary policy to maintain price stability and an adequate flow of 253 CU IDOL SELF LEARNING MATERIAL (SLM)

credit. The rates used by RBI to achieve this are the bank rate, repo rate, reverse repo rate and the cash reserve ratio. Reducing inflation has been one of the most important goals for some time. 14.2 BANKING SERVICES The necessity of saving money was felt by people even in older days. They used to keep money in their homes. With this practice, savings were available for use whenever needed, but it also involved the risk of loss by theft, robbery and other accidents. Thus, people were in need of a place where money could be saved safely and would be available when required. Banks are such places where people can deposit their savings with the assurance that they will be able to withdraw money from the deposits whenever required. People who wish to borrow money for business and other purposes can also get loans from the banks at reasonable rate of interest. Bank is a financial institution that accepts deposits and channels the money into lending activities. “Bank is a lawful organization, which accepts deposits that can be withdrawn on demand. It also lends money to individuals and business houses that need it.” Banks also render many other useful services – like collection of bills, payment of foreign bills, safe-keeping of jewellery and other valuable items, certifying the credit- worthiness of business, and so on. Banks accept deposits from the general public as well as from the business community. Anyone who saves money for future can deposit his savings in a bank. Businessmen have income from sales out of which they have to make payment for expenses. On deposits, Banks give interest, which adds to the original number of deposits. It is a great incentive to the depositors. It promotes saving habits among the public. On the basis of deposits banks also grant loans and advances to farmers, traders and businessmen for productive purposes. Thereby banks contribute to the economic development of the country and wellbeing of the people in general. Banks charge interest on loans. The rate of interest is generally higher than the rate of interest allowed on deposits. Banks also charge fees for the various other services, which they render to the business community and public in general. Interest received on loans and fees charged for services which exceed the interest allowed on deposits are the main sources of income for banks from which they meet their administrative expenses. The activities carried on by banks are called banking activities. ‘Banking’ as an activity involves acceptance of deposits and lending or investment of money. It facilitates business activities by providing money and certain services that help in exchange of goods and services. Therefore, banking is an important auxiliary to trade. It not only provides money for the production of goods and services but also facilitates their exchange between the buyer and seller. You may be aware that there are laws which regulate the banking activities in our country. Depositing money in banks and borrowing from banks are legal transactions. Banks are also under the control of government. Hence, they enjoy the trust and confidence of people. Banks depend a great deal on public confidence. 254 CU IDOL SELF LEARNING MATERIAL (SLM)

14.3 NON-BANKING SERVICES The world over, non-banking financial entities complement the mainstream banking system in the process of financial intermediation. Regarded as shadow banks by the Financial Stability Board (FSB) – “entities and activities outside the regular banking system”, these specialized intermediaries leverage on lower transaction costs, financial innovations and regulatory arbitrage. Given the nature of their operations, NBFCs also carry inherent risks including, excess leverage, amplification of procyclicality and over-reliance on wholesale funding. Given their exposure to niche segments, they may also suffer from concentration of risks. They are often not allowed the benefit from the central bank as lender of last resort and from deposits insurance institutions. The shadow banking sector in India primarily includes NBFCs and collective investment vehicles such as money market funds, fixed income funds, mixed funds, real estate funds, and credit intermediation like securitization vehicles and structured finance vehicles. NBFCs are, however, distinctly different from shadow banking entities in other countries. They are regulated by the Reserve Bank of India (RBI) with priority being assigned to calibrating regulations to harmonies them with those of the banking sector regulations to minimize the scope of regulatory arbitrage. NBFCs are gaining increasing importance in the Indian financial system, accounting for about 9 per cent of the total assets of the financial sector – the third largest segment after scheduled commercial banks or SCBs and insurance companies. Mapping of the degree of interconnectedness showed that NBFCs had the third largest bilateral exposures after banks and mutual funds. 14.4 COMPARISON OF INTERNATIONAL BANKING The finance sector in India is revolutionizing. The Non-Banking Financial Companies (NBFCs) have rapidly emerged as an important segment as an alternative lender to provide finance. NBFCs have recognized as an important financial intermediary particularly for the small-scale and retail sectors with the growing importance assigned to financial inclusion. NBFC is a heterogeneous group of financial institutions. They offer facilities like equipment lease finance, hire purchase finance, personal loans, vehicle financing, working capital loans, housing loans, loans against shares and investment, etc. The finance sector in India is revolutionizing. The Non-Banking Financial Companies (NBFCs) have rapidly emerged as an important segment as an alternative lender to provide finance. NBFCs have recognized as an important financial intermediary particularly for the small-scale and retail sectors with the growing importance assigned to financial inclusion. NBFC is a heterogeneous group of financial institutions. They offer facilities like equipment lease finance, hire purchase finance, personal loans, vehicle financing, working capital loans, housing loans, loans against shares and investment, etc. 255 CU IDOL SELF LEARNING MATERIAL (SLM)

14.5 IMPORTANCE OF INTERNATIONAL BANKING International banking is a necessary tool for successful export and international trade business and activities. It is especially important when dealing in foreign currencies. There are many banks offering international banking services, but it is necessary to choose a bank that is adept in providing the required international services and products that the business requires. International banking accounts are especially important to businesses which the nature of the business is the import and or export of goods. International banking is offered both onshore and offshore. While domestic or onshore international banks will offer the full ranges of international banking services, domestic banks would not benefit from the tax benefits offered by offshore international banks. International banks offer many products and services that enhance any global company’s business. International banking is used by multinational corporations, commodity companies and international producers and manufacturers. The most important and most common product offered by international banks is the letter of credit for both import and export activity. This letter of credit is a critical tool that allows businesses to secure credit and sale terms between themselves. Until recently letters of credit were only available in physical form and took time to be sent between companies, whereas today, web based financial products such as on-line letters of credit are available as a service from some international banks.  International funds transfer or wire payments  Foreign exchange and foreign currency transactions and foreign currency drafts  Clearing house services  Travelers checks  Collections of foreign checks  Trade finance and services  Foreign Accounts Receivable Financing  Standby letters of credit  Documentary collections  Clean collections and cash letters  Export and import financing  Import and export documentary collections  Bankers’ acceptances 256 CU IDOL SELF LEARNING MATERIAL (SLM)

Though not all of the above services are offered by all banks either offshore or onshore, international banking services should at all times facilitate prepayments and structured pre- exporting of goods, insurance and guarantee programs where programs offered locally or through the bank can be engaged to basically reduce the level of risk of the company. There are international programs such as those through world banks and other large banks that offer guarantees as credit support and enhancement. Recent Trends and Development in Banking Sector Today, we are having a fairly well-developed banking system with different classes of banks – public sector banks, foreign banks, private sector banks, regional rural banks and co- operative banks. The Reserve Bank of India (RBI) is at the paramount of all the banks. The RBI’s most important goal is to maintain monetary stability (moderate and stable inflation) in India. The RBI uses monetary policy to maintain price stability and an adequate flow of credit. The rates used by RBI to achieve the bank rate, repo rate, reverse repo rate and the cash reserve ratio. Reducing inflation has been one of the most important goals for some time. Growth and diversification in banking sector have transcended limits all over the world. In 1991, the Government opened the doors for foreign banks to start their operations in India and provide their wide range of facilities, thereby providing a strong competition to the domestic banks, and helping the customers in availing the best of the services. The Reserve Bank in its bid to move towards the best international banking practices will further sharpen the prudential norms and strengthen its supervisor mechanism. There has been considerable innovation and diversification in the business of major commercial banks. Some of them have engaged in the areas of consumer credit, credit cards, merchant banking, internet and phone banking, leasing, mutual funds etc. A few banks have already set up subsidiaries for merchant banking, leasing and mutual funds and many more are in the process of doing so. Some banks have commenced factoring business. “New generation banks are not just banks who are involved in the implementing a new strategy for the sake of survival. But banks who are involved in the process of creating a paradigm shift to overcome the ever-changing market requirements and customer preferences by the way they organize the internal and external activities, and initiatives by considering traditional human values and using modern technology. That may result in creating larger revenues by properly investing and managing the funds to create optimum profit and goodwill for the long run of the business can be considered and proved as sustainable”. Similarly, ages pass on and so does time, thus organizations who are involved in creating change and surviving the change by implementing innovative and effective strategies to serve the future generations to come can be considered so. Thus, in this process the bank that excels with its innovative strategy is to be considered as a new generation bank as those strategies used to exhibit customer service and welfare is just a marketing strategy which brings in customers but on a long run it’s only the internal affairs and money management strategy that helps a business retain its position in the market. 257 CU IDOL SELF LEARNING MATERIAL (SLM)

14.6 SUMMARY  “New generation banks are not just banks who are involved in the implementing a new strategy for the sake of survival. But banks who are involved in the process of creating a paradigm shift to overcome the ever-changing market requirements and customer preferences by the way they organize the internal and external activities, and initiatives by considering traditional human values and using modern technology. That may result in creating larger revenues by properly investing and managing the funds to create optimum profit and goodwill for the long run of the business can be considered and proved as sustainable”.  Similarly, ages pass on and so does time, thus organizations who are involved in creating change and surviving the change by implementing innovative and effective strategies to serve the future generations to come can be considered so. Thus, in this process the bank that excels with its innovative strategy is to be considered as a new generation bank as those strategies used to exhibit customer service and welfare is just a marketing strategy which brings in customers but on a long run it’s only the internal affairs and money management strategy that helps a business retain its position in the market.  Real Time Gross Settlement system, introduced in India since March 2004, is a system through which electronics instructions can be given by banks to transfer funds from their account to the account of another bank. The RTGS system is maintained and operated by the RBI and provides a means of efficient and faster funds transfer among banks facilitating their financial operations. As the name suggests, funds transfer between banks takes place on a 'Real Time' basis. Therefore, money can reach the beneficiary instantaneously and the beneficiary's bank has the responsibility to credit the beneficiary's account within two hours.  The transfer of money from the customer remitting it to the beneficiary account usually takes place on the same day. Settlement or clearance of funds takes place in batches as specified by the guidelines by the RBI. Any amount of money can be transferred using NEFT, making it usually the best method for retail remittances. Customers with Internet banking accounts can use the NEFT facility to transfer funds nationwide on their own. Funds can also be transferred via NEFT by customers by walking into any bank branch (which is NEFT-enabled) and leaving relevant instructions for such transfer - either from their bank accounts or by payment of cash. Transfer of funds to Nepal using NEFT, is also allowed subject to limits. 258 CU IDOL SELF LEARNING MATERIAL (SLM)

14.7 KEYWORDS  Third Country Bills – Banker’s acceptances issued by banks in one country that finance the transport or storage of goods traded between two other countries.  Through Bill of Lading – A bill of lading used when several carriers are used to transport merchandise, for example, from a train to a vessel or vice versa.  Tied Loan – A loan made by a governmental agency that requires the borrower to spend the proceeds in the lender’s country.  Time Draft – A draft drawn to mature at a fixed time after presentation or acceptance.  Trade Acceptance – A draft drawn by the seller (drawer) on the buyer (drawee) and accepted by the buyer. Also called a trade bill, customer acceptance, and two-name trade paper. 14.8 LEARNING ACTIVITY 1. Create a survey on Banking Services. ___________________________________________________________________________ ___________________________________________________________________________ 2. Create a session on Comparison of International Banking. ___________________________________________________________________________ ___________________________________________________________________________ 14.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is Banking Services? 2. What is International Banking? 3. Define the term bank? 4. Write the Comparison of International Banking? 5. Write the different sector of banking sector? Long Questions 1. Explain the concept of Banking Services. 2. Explain the concept of Non-Banking Services. 259 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Illustrate the Comparison of International Banking. 4. Illustrate the Importance of International Banking. 5. Examine the concept of international banking. B. Multiple Choice Questions 1. What stock on individual stocks are referred to? a. Stock options b. Futures options c. American options. d. Individual options 2. Identify the year in which CIBIL was incorporated? a. 2000 b. 2001 c. 2003 d. 2005. 3. What gives the owner the right to buy a financial instrument at the exercise price within a specified period of time? a. Call option. b. Put option c. American option. d. European option. 4. What right does a call option give to the owner? a. The right to sell the underlying security. b. The obligation to sell the underlying security c. The right to buy the underlying security. d. The obligation to buy the underlying security. 5. What right does a call option give to the seller? 260 a. The right to sell the underlying security b. The obligation to sell the underlying security c. The right to buy the underlying security d. The obligation to buy the underlying security CU IDOL SELF LEARNING MATERIAL (SLM)

Answers 1-a, 2-a, 3-a, 4-c, 5-b 14.10 REFERENCES References book  Diamond, Douglas W. and Philip H. Dybvig, “Bank Runs, Deposit Insurance, and Liquidity,” Journal of Political Economy, 91 (June 1983).  Fahlenbrach, Rudiger and Rene M. Stulz, “Bank CEO Incentives and the Credit Crisis,” Journal of Financial Economics, 99 (January 2011).  Fama, Eugene F. and Michael C., Jensen, “Separation of Ownership and Control,” Journal of Law and Economics, 26 (October 1983). Textbook references  Jensen, Michael C. and Meckling, William H., 1976, \"Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,\" Journal of Financial Economics, 3 (October).  Keeley, Michael, “Deposit Insurance, Risk, and Market Power in Banking,” American Economic Review, 80 (December 1990).  Lown, Cara S., Stavros Peristiani, and Kenneth J. Robinson, “Capital Regulation and Depository Institutions,” in James R. Barth, R. Dan Brumbaugh, Jr., and Glenn Yago, eds., Restructuring Regulation and Financial Institutions. Santa Monica, Calif.: Milken Institute Press, Website  https://icsi.edu/media/portals/70/NBFC22MAR.pdf  https://www.researchgate.net/publication/335544028_PERFORMANCE_OF_NON- BANKING_FINANCIAL_INSTITUTIONS_IN_INDIA/link/5d6cffca458515088606 b5d2/download  https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/01AR101017F2969F6115EB4B5992B D73976F9A905D.PDF 261 CU IDOL SELF LEARNING MATERIAL (SLM)