VIDYAVARDHINI’S
A.V.COLLEGE OF ARTS,
K. M. COLLEGE OF COMMERCE,
E. S.COLLEGE OF SCIENCE,
VASAI ROAD (W).
CERTIFICATE
Following students are successfully
completed the project on a subject of
International Banking and Finance and the
topic on Evolution to International Banking.
We all are thank you to Prof. Mrs. Bharati
Shukla. For giving this opportunity.
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Bhagyashree A. Mane.
Supriya R. Pawar.
Pooja V. Kalal.
Pragati G. Singh.
Supriya M. Palsamkar.
GROUP MEMBERS ROLL NO.
1.
2.
3.
4.
5.
Bhagyashree A. Mane.
Supriya R. Pawar.
Pooja V. Kalal.
Pragati G. Singh.
Supriya M. Palsamkar.
30
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56
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SUBMITTED TO:
Prof. Mrs. Bharati Shukla.
DATE:
9/07/2012
Acknowledgement
We, the student of “Third Year B.com (Banking
& Insurance)” have completed the project on
International Banking and Finance.
As such, the project work is so, complicated
without guidance of professors it would have been
impossible to take such a task.
Here by, we take this opportunity to express
our sincere acknowledgement for successful
completions of project on Evolution to
International Banking. We are grateful to our
project guide Mrs. Bharati Shukla.
As it was a team work. We acknowledge the
invaluable support, advice instruction, and essential
motivation of our professor.
Evolution to
International
Banking
Introduction
The term banking is derived from the word
‘banco’ means a bench. The term banking has
undergone tremendous change over the years. The
traditional and commercial banking activities of
accepting deposits and lending has been replaced by
the concept of universal banking and now
international banking.
Meaning:
Banks are intermediaries which accept
deposits and lend money to the industrial and
personal borrower. Bank earn spread which is the
difference between deposit interest rate and lending
rates. Spread is the recovery of cost and profit.
International banking include all activities and
services that facilitate the movement of goods and
services and fund from one country to another
country.
Functions of international banking:
1. Non-resident accounts- NRE ,NRO, FCNR:
Bank provides various services to
nonresident. The banks open account for
nonresident which helps them in making or
receiving the remittances from abroad and also keep
the deposits in foreign exchange e.g.FCNR.
The 3 main types of account are opened for non
resident are nonresident external (NRE),
nonresident ordinary(NRO), and foreign currency
non resident(FCNR).
2. Financing export:
Bank provide finance to exporter to enable
the m to effect the exports. Bank provide credit
facilities. The pre-shipment credit also called as
packing credit enable the exporter to avail credit
facilities at a concessional rate enabling them to
procure the row material , process them, make
finished gods, pack them and ship them. Bank also
provide post-shipment.
3. Financing imports:
Bank provides credit facilities to enable them
to import goods on credit. Issuing guaranties etc. the
main facilities granted for importer are by way of
letter of credit. Letter of credit is a secured mean of
payment. In modern world it is not possible for the
buyer and seller to meet each other face to face and
most of the traders are done through electronic
media giving rise to credit risk or default risk.
4. Issue of Guarantee:
as part of international banking function,
banks provide guarantees favoring the beneficiary at
the request of its customer. Bank issues guarantees
for making the payment to the beneficiary in case of
default by the borrower.
5. Foreign currency loan:
In view of the integration and globalization of
the economy’s the corporate are able to raise foreign
currency loan from overseas lenders. The foreign
currency loan are normally denominated in
currencies namely dollar, pound.
6. Syndication Of Loan:
In view of the need for huge size of loans and
multiplicity of bank and the short time of sanction,
the banks fecilitates the borrower by providing
syndication of loans.
7. Correspondent banking:
The growth of banking activities, free
movement of goods, services and fund between the
countries have necessitated the need for increase
presence of banks in various part of the world.
However, as it is not economically viable and
practically feasible for the banks to open their offices
and branches in all part of the world.
Evolution of international banking:
International banking as we experience today
has evolved out of various stages.
Factors:
a. Effects of world war II:
The Second World War
effectively stopped all international
economic activity. Global economic growth was
severely affected. During the past world war period,
the economic growth was several affected. During
the past world war period, the economies has the
sole objective of restructuring and restructuring
their respective nations and to ensure the stability in
the economic development.
b. Collapse of Bretton woods:
The continuing war also made any
corporation on the economic front impossible. In this
scenario, the need was felt an economic system
which would again make international trade and
investment possible. In 1944, representative of 44
countries met in bretton woods, New Hampshire,
USA, and signed an agreement to establish a new
monetary system which would address all these
needs. The two super national institution we
developed viz. the world bank and IMF(International
monetary fund).under this system, all the member
countries agreed to maintain the exchange rates for
their currency within a brand of one percent. The
monetary authorities were to stand ready to buy or
sell and thus support their exchange rate.
For this purpose, gold reserves needed to be
maintained by the US and dollar reserves by the
countries. Thus, increase in trade required increase
in official reserves. In 1967, Britain devalued its
currency Pound. In 1968 there was outflow of
capital from France due to political disturbances. In
1969, France was devalued.
Germany followed suit and all the above led to the
breakdown of Bretton woods system by 1970.
c. Oil crisis and impact
on US Economy:
The world oil shock of
1973, when Arab member of
OPEC announced that they
would no longer ship
petroleum to nations that had supported Israel in its
conflict with Egypt. The price of oil went up by over
17% from USD 3.65 per barrel to USD 80 per barrel
by 1980. This decision affected the western
countries and USA. USA with 6% of the world
population was consuming more than 33% of the
world’s oil. Oil consumption in US more than
doubled between 1950 and 1974. US economic
policies had an important effect on the crisis. The
economy was slow and inflation started troubling.
Value of the Dollar went down and so did the oil
prices.
d. Integration of World Markets:
The abundance of resources at
one place and the scarcity/
shortage of resources at another
place is the basic cause of trade.
The same holds true for domestic
and international trade. Such circumstances call for
transfer of resource among countries to optimize the
final output. The integration of markets involves the
freedom and opportunity to raise funds and invest
them anywhere in the world. Through the freedom of
operation differs from country to country, however,
in view of such freedom, anything affecting the
financial markets in one part of the world
automatically and quickly affects the rest of the
world also.
e. Globalization of Economies/Liberalization:
Globalization involves the various
markets getting integrated across
geographical boundaries. It involves
the freedom and opportunity to raise
funds from and invest anywhere in the
world. Globalization effect is seen in
the volatility of interest rates, exchange rates, price
of financial assets etc. The most significant
liberalization measure was the lifting of exchange
controls in France, UK, and Japan. Domestic market
was opened to foreign borrowers and domestic
borrowers were allowed to access foreign markets.
f. Euro Markets:
The post world war period
saw the emergence of regional
group, the Euro currency market
emerging as one of the leading
sources of international financial and channel of
investment. The growth of Euro market was mainly
because of various restrictions imposed by the US
authorities mainly in the form of ceilings on the rate
of interest on deposits, reserve requirements. These
restriction did not apply to branches of Americans
banks located outside the US. This led to number of
American banks moving out of US and they
accepting dollar deposits.
Growth of International Banking:
Reasons:
1. Migration of Enterprises:
As enterprises become multinational, banks also
expand with them. They are mutually beneficial
because entrepreneurs have comfort, proven track
record and established creditworthiness with their
bankers. So, if the same banks offer services in other
countries/ subsidiaries too, them it is an ease for
cost, time account handling.
2. Cost of Capital:
In some countries, especially developed,
abundant capital is available at a
lower rate. In developing and Less
Developing Countries (LDC), capital
is costly. For instance, Japan had
lowest cost of capital for many years.
This is great opportunity for banks as they can
sources deposits at lower rate and lend at higher
rate in a different country. This enhances profit
margins of the banks.
3. Diversification:
Diversification reduces
systematic and sovereign risk. It also
offers typical business diversification.
If banking slows down in one
economy, it may be better in another,
thereby bringing stability in profits.
4. Regulatory Avoidance:
Banks may set-up multi-country offices to
avoid/manipulate reserve requirements,
cumbersome reporting requirement, tax adjustment,
etc. They may be able to escape many things of
domestic regulations by routing through another
country office.
5. Expansion of Banks custodial function:
Custodial services are granted to clients who
make investment in overseas securities. The banks
have to collect the securities, collect dividends and
offer other related services. Banks have moves
abroad in response to demand for these services by
their customers.
Features:
1. Currency risk:
International Bank in
different currencies. Currencies may weaken or
strengthen with respect to each other. Accordingly
wealth value of bank may vary. This is a significantly
aspect in International arena.
2. Complexity of credit risk:
Credit risk has additional dimensions of
sovereign-political risk and also socio-cultural factor
about honoring credit.
3. Competition for market share among
banks:
Competition is stiff because of
presence of many gaint bankers. This
in effect reduces margins and
demands highly efficient performance.
4. Cyclical nature, with periodic crises:
World economics are not moving in unsion.
Cycles of growth and recession move from one
continent to another. Multinational Banks face these
waves and also occasional crisis such as crash of an
economy. E.g. South Asian Crisis.
5. Competition for bank loans from the
international bond market:
Threat of disintermediation is more because
international banking has many big value
transactions which may eventually bypass banks.
Bond market is matured in developed countries,
even for foreign currency, even for foreign currency
denominated bonds.
6. Importance of international interbank
market (IIBM) as source of liquidity and
funding for banks:
Interbank’s transactions in multiple
currencies are common in International Banking. In
effect bankers enjoy liquidity solutions.
7. Role of risk management activities(swaps,
options, futures):
Being in forex market, banks deal with
additional hedging instruments such as currency
futures/options etc.
FORMATION OF bis:
The Bank for International Settlement (BIS –
Basel, Switzerland) is the world’s oldest
international financial institution and remains to
this day the principal centre for international
central bank cooperation. The BIS was established
in the context to the Young Plan (1930), which dealt
with the issue of the reparation payments imposed
on Germany by the Treaty of Versailles. The new
bank was to take over the functions previously
performed by the Agent General for Reparations in
Berlin and to act as a trustee for the Dawes and
Young Loans. In addition, the BIS was expected to
promote central bank cooperation in general. The
reparations issue quickly faded into the
background, focusing the Bank’s activities entirely
on cooperation among central banks and,
increasingly, other agencies in pursuit of monetary
and financial stability.
In 1945 New international financial
institutions like the “International Monetary Fund”
(IMF) the “World Bank” and the “Bank of
International Settlements” were created to extend
economic hegemony through the Planet.
Events in International
Banking:
1. The 1973 Energy(oil)
Crisis:
The world oil shock of 1973, when Arab
member of OPEC(Oil & Petroleum Export in
Country) announced that they would no longer ship
petroleum to nations that had supported Israel in its
conflict with Egypt. The price of oil went up by over
17% from USD 3.65 per barrel to USD 80 per barrel
by 1980. This decision affected the western
countries and USA. USA with 6% of the world
population was consuming more than 33% of the
world’s oil. US economic policies had an important
effect on the crisis. The Economy Was slow and
inflation started troubling.
2. The 1982 International Banking(Debt)
Crisis:
Bank lending to LDC(Less Developed
Countries) continued to grow rapidly till early 1980s.
The strengthening of USD during 1980s adversely
affected debt problems of LCDs as the loans were
Dollar denominated. Increased interest rates and
strengthening of Dollar resulted in effective interest
rates around 30% per annum. In August 1982,
Mexico, Brazil & Argentina are announced that it
was unable to pay its debt to international creditors.
The debt crisis affected all the lending countries as
well. The international financial markets were
severally affected.
3. The Baker Plan:
The baker plan was launched in October
1985 at the IMF World Bank Meeting, by United
States Secretary of the Treasury, James Baker as
way to combat the international debt crisis. The plan
was aimed to help countries not being incredibly
poor but owe a large amount of money. There were
15 countries mentioned and 10 of these were to be
found in Central and Latin America. Ultimately, the
Baker Plan failed.
4. The Brady Plan:
From 1982 through 1988, debtor nations
and their commercial bank creditors engaged in
rescheduling and restructuring sovereign and
private sector debt, in the belief that the difficulty
these nations experienced in meeting their debt
obligation. Most debtors nations no closer to
financial health and that some of relif was necessary
for these nations to resume growth. The Brady Plan,
the principles of which were first articulated by US
5). Basel-I:
A committee of the central bank of G10
countries was formed to stabilize the banking system
and regulate it properly. It is called as Basel
committee of banking supervision (BCBS. The Basel
committee in based city, swizerland, published a set
of minimal capital requirement for banks. This is
also known as the 1988 Basel Accord, was enforced
by law in the group of Ten(G-10) countries in
1992.The major impetus for the 1988 Basel Capital
Accord was the concern of the G-10 center banks
that the capital of the worlds major banks had
become dangerously low after persistent erosion
through competition.
6). East Asian Financial
Crisis:
It was a period of
economic unrest in july
1997 in Thailand and south
Africa and affected currencies, stock markets, and
other assets prices in several Asian countries.
7). Basel II:
In January 2001 the Basel committee on
Banking supervision issued a proposal for a New
Basel Capital Accord that, once finalized, will
replaced the current 1988 Capital Accord. The
proposal is based on three mutually reinforcing
pillars that allow banks and
supervisors to evaluate
properly the various risks
that banks face.
a). Minimum capital
requirements, which seek to
refine the measurement
framework, set out in 1988 Accord.
b). Supervisory review of an institution’s capital
adequacy and internal assessment process.
c). Market discipline through effective disclosure to
encourage safe and sound banking practices.
INTERNATIONAL BANKING IN INDIA:
Today all major international banks have
operations in India. International banks are
government by applicable banking laws. In addition,
they also fall under purview of FEMA. With
globalization, more and more foreign banks would
get entry in India.
Need and Importance:
1. India poised to be the third largest in public
private partnership PPP by the year 2025.PPP
solicits participation of private sector enterprises in
infrastructure development. Infrastructure was so
far the monopoly and responsibility of the
government.
2. India is sixth largest in foreign exchange reserves.
3. India is haven for techno-MNCs-third biggest
market for computer goods, cellular industry.
4. Internationally acknowledged base for ITES
segment.
5. Identified hub for auto component industry.
6. Indian conglomerates on foreign acquisition spree.
Tata’s and other have acquired international firms.
7. Vast industrial & services infrastructure.
ROLE OF INTERNATIONAL BANKING IN
INDUSTRIAL GROWTH IN INDIA:
1. Contribution of services sector to India’s GDP is
growing. Service sector would need greater support
from the banks.
2. Agriculture provides largest pool of jobs. Banks
need to address the need of agro-industry and agribusiness.
3. Banks can contribute in all sectors for generating
savings, augment capital formation and help
increase income levels.
4. Banks have greater role in Exports and Trade
Finance:
Trade Finance is a forte of Indian banks. Exports are
a national priority. Banks initiatives in this regard
a). Centrally integrated treasury.
b). Specialized overseas branches.
c). Offering of derivatives products to clients.
d). Offering risk mitigation and hedging mechanism.
Global Competition in international
banking:
This is an era of intense global competition in
international banking. Mergers and acquisition as a
part of consolidation are also happening. The major
competitors include European, Japanese and
American Banks.
1. European Banks:
These banks have solid
capital base, strong balance
sheet, healthy financial
conditions of home markets due
to European Unification.
Dominant banks from Europe
and Germany’s Deutsche Banks, Union Banks of
Switzerland, Credit Suisse, Swiss Bank Corporation,
and England’s Barclay’s Bank.
2. Japanese Banks:
Japanese banks are
technologically progressive but do
not have history of strong capital
bases. Things are changing.
3. US Banks:
Weak capital which was
mainly due to LDC lending written
off, is improving now and US
banks are becoming very strong in
International banks.
Conclusion:
Banking transaction crossing national
boundaries in termed as International Banking.
International Banking as we experience today has
evolved out of various staged. The bench banking
got replaced with commercial/traditional banking,
The traditional banking has been replaced with
Universal banking (all under one roof) and
Universal banking has got extended with
international banking because of Effects of World
War II, Collaps of Bretton Woods, Oil crisis and
impact on US economy, integration of world
markets Globalization of economies/Liberalization
and euro markets.
BIBLIOGRAPHY:
www.google.com
www.wekepedia.com
BOOK REFERED:
International Banking and Finance
-Dipak Abhyankar