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OUTLINE:
- International Banking:
- Exchange rates and Forex Business
- Correspondent banking and NRI Accounts
- Letters of Credit
- Foreign currency Loans
- Facilities for Exporters and Importers
- Role of ECGC
- RBI and EXIM Bank
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MEANING
International banking means opening banks outside country of origin. It is a mechanism by which one can manage bank accounts outside their country of residence.
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It is also known as "offshore banking".
EXCHANGE RATES
It is the rate at which one currency is exchanged for another.
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It is also known as foreign-exchange rate, forex rate, ER, FX rate.
TYPES OF EXCHANGE RATE
- Fixed Exchange Rate System
Fixed rates provide greater certainty for exporters and importers.
- Flexible Exchange Rate System
Flexible exchange rate or floating exchange rates change freely and are determined by trading in the forex market.
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- Exchange rate fluctuations
A reliable forecast or future spot rate is called study of empirical patterns of exchange rate fluctuation.
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It provides essential information for exchange rate exposure.
Factors Influencing the Exchange Rate
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- International trade
- Capital movements
- Change in prices
- Speculations
- Strength of the economy
- Government policies
- Stock exchange operations
- Political factors
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MEANING
- Foreign exchange is the mechanism by which the currency of one country gets converted into the currency of another country.
- The conversion of currency is done by banks who deal in foreign exchange. Banks maintain stocks of one currency in the form of balances with banks
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OPERATION OF FOREIGN EXCHANGE MARKET
- Foreign exchange market operates either as:-
- Spot Market: (Current Market)
- Forward Market
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Spot Market: (Current Market)
Spot market for foreign exchange is the market which handles only spot transactions or current transactions.
- Principle characteristics:-
- Spot Market is of daily nature. It does not trade in future deliveries.
- Operation of foreign exchange market
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Forward Market
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Forward Market for foreign exchange is that market which handles such transactions of foreign exchange as are meant for future delivery.
- Principles Characteristics:-
- It only caters to forward transaction.
- It determines forward exchange rate at which forward transaction are to be handled.
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The Foreign Exchange Market for Beginners
- The foreign exchange market or forex as it is often called is the market in which currencies are traded.
- Currency Trading is the world's largest market consisting of almost trillion in daily volume and as investors learn more and become interested, market continues to rapidly.
- All trades that take place in the foreign exchange market involve the buying of one currency and the selling of another currency simultaneously. This is because the value of one currency is determined by its comparison to another currency.
- The first currency of a currency pair is called the "base currency," while the second currency is called the counter currency.
- Foreign exchange Capital Markets (FXCM) online currency trading firm that offers a free demo account to traders who are new and interested in the foreign exchange market.
- Registering for a demo account allows a new trader to download the online trading platform that is used by the company's clients trading accounts and make trades as if they were doing with real money.
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NATURE OF FOREIGN EXCHANGE
- Volatile, affected by hedger, arbitrager, speculator
- Affected by demand and supply
- Affected by rate of interest
- Affected by BoP surplus and deficit
- Affected by inflation rate
- Affected by the fiscal policy of the government
- Affected by the political condition of the country
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Characteristics of foreign exchange
- Lower trading cost
- Excellent transparency
- Superior liquidity
- Strong market trends
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CORRESPONDENT BANKING
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NRI ACCOUNTS
CORRESPONDENT BANKING
A correspondence bank is a financial institution that provides services on behalf of another, equal or unequal, financial institution.
It can facilitate wire transfers, conduct business transactions, accept deposits, gather documents on behalf of another financial institution.
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A correspondent account is an account (called a nostro or vostro account) established by a banking institution to receive deposits from, make payments on behalf of, or handle other financial transactions for other financial institutions.
- Correspondent banks are used by domestic banks in order to service transactions originating in foreign countries, and act as a domestic bank agent abroad.
- This is done because the domestic bank may have limited access to foreign financial markets, and cannot service its client accounts without opening up a branch in another country.
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A Correspondent Banking relationship involves the provision of banking services by one financial institution (a Correspondent bank) to another financial institution (Correspondent Banking Client)
Services offered under CB
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- payments including telegraphic or electronic transfers and drafts.
- Foreign exchange
- Payable through and nested accounts
- Managed investments and mortgage schemes
- Custodian account arrangements
- Trade finance transactions
- Syndicated loans
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INTRODUCTION
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- To meet the specific needs of Non Resident Indians related to their remittances, savings, earnings, investments and repatriation, the GOI introduced NRI Non resident(External) account rules which are controlled by the exchange control regulations.
Types of NRI bank account
- Non-Resident Externals (NRE) Deposits
- Non-Resident Ordinary (NRO) Savings
- Foreign Currency Non-Resident (FCNR) Deposits
- Resident Foreign Currency (RFC) Deposits
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Non-Resident External (NRE) Deposits
- The Non Resident External (NRE) saving account is open for Indian residing abroad.
- This account will help you to transfer your foreign earning easily to India .
- NRE account can be opened in any bank as saving and fixed deposit account.
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Benefits of NRE Account
- There is no tax and no wealth tax
- The currency maintain in this account is in Indian Rupees.
- Funds can be easily transferred from NRE account to any other account
- Joint account facility is available with only NRI's
- Nomination facility is available with only NRI Indian
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Non-Resident Ordinary (NRO) Savings Account
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- Non Resident ordinary (NRO) account is just like any other bank account with the only difference that this account is being opened for only those individuals who are leaving India for taking an employment or establishing a business outside India.
- The existing accounts for these Indians are termed as Ordinary Non Resident account or as NRO Accounts.
- These accounts can also be opened through remittance. Thus it's a rupee denominated account
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Benefits of NRO Account
- Interest earned on these accounts is high and banks can themselves determine interest rates.
- These accounts also offer joint account facility with a resident or a NRI individual.
- Nomination facility is available with both resident Individuals.
- It is taxable.
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| Type of Account | NRE Non Resident External Account | NRO Non Resident Ordinary account |
|---|---|---|
| Repatriation --- Content provided by FirstRanker.com --- (can take outside India) | NRE account is freely repatriable | NRO account has limited repatriability |
| Tax in India | NRE account is Tax free | The interest earned on this account and credit balances are subject to tax rules |
| Deposit of Income generated in India, such as salary, rent, dividends etc | Deposit of income earned in India is NOT allowed in NRE account | Deposit of income earned in India is allowed in NRO account |
| Joint Holding | NRE account can be jointly held with another NRI but not with resident Indian. | NRO account can be jointly held with NRI as well as with resident Indian (close relative) |
| Suitable for | Parking overseas earnings remitted to India converted to Indian Rupees Want to maintain savings in Rupee but keep them liquid | Want to park Indian earnings in Rupees |
| Points of Difference | NRE Account | NRO Account | FCNR |
|---|---|---|---|
| Currency | Rupee Denominated (INR) | Rupee Denominated (INR) | USD, GBP, Euro, AUD, CAD, JPY, CHF |
| Who can open such Account? | NRI | NRI, Resident before becoming an NRI | NRI |
| Can it be opened jointly? | Yes, both with Resident""/Non-Resident | Yes, both with Resident/Non-Resident | Yes, both with NRI |
| Type of Account | Saving, Current or a Fixed/ Term Deposit | Saving, Current or a Fixed/Term Deposit | Fixed |
| Purpose to open such Account | NRE Accounts are used to hold overseas savings remitted to India after converting to INR | NRO Accounts are used to hold Indian income like rent, dividend etc. | FCNR (B) account is opened as term deposit |
| Repatriation | Yes | Only interest on NRO account balance (after deducting TDS) | Yes |
| Transfer of funds from one Account to another | Funds can be transferred from NRE account to NRE/NRO/Resident Account | Funds can be transferred from NRE account to NRO/Resident Account | Funds can be transferred to NRE/NRO Account |
| Deposit of rupee funds generated in India | No | Yes | No |
| Tax | Tax Free | Taxed as per applicable slab rate | Tax Free |
| What is the status of the account when NRI returns to India | Converted to resident account | Converted to resident account | Converted to resident account |
| Is Power of Attorney allowed | Yes | Yes | Yes |
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Foreign currency nonresident (FCNR) fixed deposit
- FCNR Deposits are maintained in foreign currency and they are completely safe against any exchange rate fluctuations.
Benefits of FCNR
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- Interest is payable in the same currency as the deposit at Half yearly.
- FCNR account can be opened jointly with other non-residents.
- FCNR a/c can be converted or also transferred to NRE accounts.
- No income tax on interest earned.
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Resident Foreign Currency (RFC) Deposit
- RFC Deposit has been specially created for persons of Indian nationality or origin returning to India permanently for settlement after having been a resident outside India for a continuous period of at least one year.
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Benefits of RFC
- The account will be denominated in USD, GBP, and EURO.
- The account can be held single or jointly.
- The account can be maintained in the form of Term Deposit account.
- The balance in the account can be freely used for local disbursements.
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Additional Service FOR NRI ACCOUNTS
- An individual resident Indian can borrow a sum not exceeding USD 250,000 or its equivalent staying outside India, subject to the conditions that:
- The minimum maturity period of the loan is one year;
- The loan is free of interest
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What Happens to NRE, NRO and FCNR account, When NRI returns back to India?
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- Your NRO account will be converted back to resident saving account.
- Your NRE and FCNR account may be converted to RFC (Resident Foreign currency) account should you opt for.
- Your NRE and FCNR term deposit can continue with contracted rate, should you decided not to break them prematurely.
- After maturity, NRE and FCNR fixed deposit account will be converted to RFC account.
- If you stayed abroad for 9 years in previous 10 years then interest earned on RFC account is tax free for another 2 years.
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LETTER OF CREDIT
MEANING:
- A letter of credit is a document from a bank guaranteeing that a seller will receive payment in full as long as certain delivery conditions have been met. In the event that the buyer is unable to make payment on the purchase, the bank will cover the outstanding amount.
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TYPES OF LOC
- Import and Export Letter of Credit
- Revocable and Irrevocable Letter of Credit
- Confirmed and Unconfirmed Letter of Credit
- Transferrable and Un transferrable LoC
- Deferred/ usance LoC
- Red clause Loc
- Back to back Loc
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Import and Export Letter of Credit
- Are letters of credit that are used in international trade. The same letter of credit would be termed an import letter of credit by the importer and an export letter of credit by the exporter. In most cases the importer is the buyer and the exporter is the beneficiary.
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Revocable and Irrevocable Letter of Credit
- The revocable letter of credit can be changed at any time by either the buyer or the issuing bank with no notification to the beneficiary.
- Irrevocable letter of credit only allows change or cancellation of the letter of credit by the issuing bank after application by the buyer and approval by the beneficiary
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Confirmed and Unconfirmed Letter of Credit
- A confirmed letter of credit is one where a second bank agrees to pay the letter of credit at the request of the issuing bank.
- An unconfirmed letter of credit is guaranteed only by the issuing bank. It is the most common form with regard to confirmation.
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Transferrable and Un transferrable
- A letter of credit may also be a transferrable letter of credit. These are commonly used when the beneficiary is simply an intermediary for the real supplier of the goods and services or is one of a group of suppliers.
- An un-transferrable letter of credit does not allow transfer of payments to third parties.
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Deferred/ usance LoC
- A letter of credit may also be at sight which is payable as soon as the documentation has been presented and verified, or payment may be deferred.
- Deferred letters of credit are also called a usance letter of credit and may be paid off until a certain time period has passed or the buyer has had the opportunity to inspect or even sell the related goods.
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Red clause Loc
- A red clause letter of credit allows the beneficiary to receive partial payment before shipping the products or performing the services.
- Originally, these terms were written in red ink, hence the name. In practical use, issuing banks will rarely offer these terms unless the beneficiary is very creditworthy or an advising bank agrees to refund the money if the shipment is not made.
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Back to back Loc
- A back-to-back letter of credit is used in a trade involving an intermediary, such as a trading house.
- It is actually made up of two letters of credit, one issued by the buyer's bank to the intermediary and the other issued by the intermediary's bank to the seller.
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Foreign currency Loan
Meaning:
- Foreign currency loans are all loans made or taken for which the contract currency is different to the local currency (balance sheet/company code currency).
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Eligibility
- Exporters for working capital needs
- Importers for meeting import obligations
- Importers of capital goods
- Those customers who have earlier raised medium term Loans for meeting capital expenditure from other financial institutions, so that these loans can be funded (subject to RBI guidelines)
- Loan to JV/WOS entities of Indian companies.
- High value corporate clients with a good track record to meet working capital requirements in substitution of WCDL
- Those customers who are looking for conversion of term/cash credit.
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Period:
- Working capital for exporter/importer- 6 months to one year.
- Importers of capital goods-3 years (subject to availability of funds)
- Substitution of WCDL/Cash Credit – 6 months to one year.
- In case of Term Loan Conversion- 6 months to 5 years (subject to availability of funds)
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Quantum/Currency:
- On transaction to transaction basis within the existing credit facilities
- Minimum USD 0.50 mn. (Rs. 2.00 Cr.) equivalent.
- Normally in US$, FC Loans can also be availed in Pound Sterling or in Euro subject to availability of funds
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Rate of Interest
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- Bench marked to relevant LIBOR rates
Repayment
- Bullet payment (one lump sum) by:
- Tendering export documents
- Proceeds of export collection bills
- Debit to EEFC accounts
- Purchase of foreign currency from the bank at contracted/ready rate if forward booking is waived
- Term loans for import of capital goods – repayment in stipulated installments
- Conversion of rupee term loans – as per original sanction terms
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Procedure
- Roll-over at the sole discretion of the Bank
- In case of loans on floating rate basis the rates are reset once in every six months
- Interest charged on reducing balance method.
- Forward cover for appropriate maturity to be booked
- Forward cover can be waived for customers having natural hedge.
- Prepayment generally not permitted
- In exceptional cases prepayment permitted. However, as an exception, prepayment is permitted in deserving cases, with levy of penalty.
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Facilities for exporters and importers
FACILITIES FOR EXPORTER
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Facilities for Exporter
- Export credit
- Export bill rediscounting
- Export credit in foreign currency
- Pre-shipment credit in foreign currency (PCFC)
- Exporter gold card
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Export Credit
- Rupee export credit (pre-shipment and post-shipment)
- Bank offers both pre and post shipment credit to the exporters through Rupee denominated loans as well as foreign currency loans in India.
- Exporters having firm export orders or L/C recognized Bank can avail the export credit facilities of United Bank of India provided they satisfy the laid down credit norms. The details of the credit norms can be obtained from the nearest authorized branch of the Bank.
- Post shipment rupee export credit is available for maximum period of -180- days /360daysfrom the date of first disbursement. The corporate, if required can enter into forward contracts in respect of future export credit
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- Export bill rediscounting:
- Bank offers financing of export by way of discounting of export bills to provide post shipment finance to the exporters at competitive international rate of interest.
- The export bills (both Sight and Usance) are purchased/discounted provided they comply with the norms of the Bank/ RBI.
- All exporters are eligible to cover the bills under L/C, non-credit bills under sanctioned limits under the Bill discounting Scheme.
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- Export credit in foreign currency
- Pre-shipment credit in foreign currency (PCFC)
- Bank provides PCFC in the foreign currency to the exporters enabling them to fund their procurement, manufacturing, processing and packing requirements.
- These loans are available at very competitive international interest rates covering the cost of both domestic as well as import content of the exports. The PCFC can be availed in USD, GBP and Japanese Yen.
- The corporate / exporters with a good track record can avail running account facility with the Bank for PCFC. To avail this purpose, the exporter's overdue bill should not exceed the average annual export realization during the preceding three years.
- PCFC in foreign currency is available for a maximum period of 180- days from the date of first disbursement similar to that of Rupee facility.
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- Export bill rediscounting:
- Bank offers financing of export by way of discounting of export bills to provide post shipment finance to the exporters at competitive international rate of interest. This facility is available in -4- currencies i.e. US$, Pound Sterling, Euro and JPY.
- The export bills (both Sight and Usance) are purchased/ discounted provided they comply with the norms of the Bank/RBI.
- All exporters are eligible to cover the bills under L/C, non-credit bills under sanctioned limits under the Bill discounting Scheme.
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- Exporter Gold Card
- Bank has formulated Gold Card Scheme for its exporter clients based on the scheme drawn by Reserve Bank of India.
- The scheme proposes to ensure easy availability of export credit on best terms to credit worthy exporters with good track record.
- The card to be offered by United Bank of India will be known as 'United Bank of India Exporter Gold Card'. The salient features of the scheme are as under:
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- Eligibility under the Scheme:
- All exporters, including those in small and medium sector having good track record and credit worthiness depending on the credit rating done as per Bank's norms.
- Exporters whose accounts have been classified as 'Standard' continuously for a period of three years and there are no irregularities/adverse features in the conduct of the accounts will be considered.
- The scheme will not be applicable to those exporters who are blacklisted by ECGC or included in RBI defaulter's list/caution list or making losses during past 3 years or having overdue export bills in excess of 10 per cent of the current year's turnover.
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Bank Facilities for Import
- Import finance
- Collection of import bill
- Letter of credit
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- Import Finance:
- Bank provides various types of finance services to the importers for facilitating imports in the country.
- The vast network of branches and Correspondent Banks worldwide facilitates prompt & efficient services to the importers.
- All the facilities are subject to the prevailing rules of the Bank/ RBI guidelines.
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- The various facilities provided are:
- Collection of import bill.
- Opening of Import L/Cs (Sight/ DA)
- Financing of import by way of Foreign Currency Loans
- Issuing Guarantees etc. on behalf of importers.
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- Collection of import bills:
- The import bills are collected through our 47 authorized branches at very competitive rates.
- The Bank has correspondent relationship with reputed International Banks throughout the world and can provide efficient services to importers who may be importing from any part of the globe.
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- Letter of credit:
- Bank offers L/C facility for the purchase of goods in the international market. Being a Prime Bank of repute, the L/Cs of the United Bank of India are readily accepted in the International market.
- With the Letter of Credit of United Bank of India, importers can build up better trust/ confidence with their suppliers and develop other business relationship at a much faster pace.
- The L/C facility can be granted to the importers after assessing their requirement/ credit worthiness, financial strength and other parameters being to the satisfaction of the Bank.
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- Bank guarantees:
- Bank on behalf of importers/ customers issues guarantees in favour of beneficiaries abroad. The guarantees can be both Performance and Financial.
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Role of ECGC, RBI and EXIM Bank
- The ECGC Limited (ECGC) was established on 30 July 1957 with the objective to provide insurance cover in respect of risks in export.
- These risk may include loss of money on account of foreign buyer becoming bankrupt or sudden import or exchange restrictions in stopping of payments etc.
- The Export Credit Guarantee Corporation of India Limited is a company wholly owned by the Government of India based in Maharashtra.
- It provides export credit insurance support to Indian exporters and is controlled by the Ministry of Commerce. Government of India had initially set up Export Risks Insurance Corporation (ERIC) in 1957.
- It was transformed into Export Credit and Guarantee Corporation Limited (ECGC) in 1964 and to Export Credit Guarantee Corporation of India in 1983. In 2014 August, the Company was again named ECGC Limited.
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What does ECGC do?
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- Provides a range of credit risk insurance covers to exporters against loss in export of goods and services.
- Offers Export Credit Insurance for Bankers and financial institutions to enable exporters to obtain better facilities from them.
- Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan.
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How does ECGC help exporters?
- Offers insurance protection to exporters against payment risks.
- Provides guidance in export-related activities
- Makes available information on different countries with its own credit ratings
- Makes it easy to obtain export finance from banks/financial institutions
- Assists exporters in recovering bad debts
- Provides information on credit-worthiness of overseas buyers
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RBI
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- RBI has issued Authorized Dealers (AD) licenses to India financial institutions and a few co-operative banks to undertake foreign exchange transactions in India
- It has also issued Money Changer licenses to a large number of established firms, companies, hotels, shops, etc.
- Money changers help facilitate encashment of currencies of foreign tourists
- Entities authorized to buy and sell foreign currencies, coins and travelers' Cheques are called full-fledged money changers
- Those authorized only to buy are called restricted money changers
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EXIM Bank
- Export-Import Bank of India (Exim Bank) was set up by an Act of the Parliament "THE EXPORT-IMPORT BANK OF INDIA ACT, 1981" for providing financial assistance to exporters and importers and for functioning as the principal financial institution for co-ordinating the working of institutions engaged in financing export and import of goods and services with a view to promoting the country's international trade and for matters connected therewith or incidental thereto.
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ASSIGNMENT:
- Explain: ECGC: Functions, role of ECGC, types of policies, risks and guarantees covered by ECGC.
- RBI: Functions, loans, schemes of RBI Regarding exports.
- EXIM bank of India: Objective, organisation of EXIM bank, Financing assistance by EXIM bank, Role of EXIM bank, EXIM bank Finance.
- Due on : 16th November, 2017
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THANK YOU
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