VIDYAVARDHINIS

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. 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 39 23 56 38

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 The traditional and commercial banking activities of accepting deposits and lending has been replaced by the concept of universal banking and now international banking.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 economys 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 worlds 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:
Interbanks 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 worlds 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 Banks 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 worlds 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 institutions 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. Tatas 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 Indias 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 Germanys Deutsche Banks, Union Banks of Switzerland, Credit Suisse, Swiss Bank Corporation, and Englands Barclays 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