CP FOREX MANUAL 2024-25

Chapter 1: Overview of International Banking & Foreign Trade Policy

Learning Objectives

  • Introduce international banking and its scope.

  • Explain the Foreign Trade Policy (FTP) issued by DGFT, guiding India’s cross-border trade.

  • Cover important provisions of the FTP relevant to bankers.

Overview of International Banking Business

  • State Bank of India (SBI): Largest commercial bank in India with a significant global presence in 32 countries, operating 236 offices, primarily focusing on India-centric business such as imports, exports, remittances, and foreign investments.

  • Key Areas in International Banking:

    • Cross-border trade: Imports and exports.

    • Financing imports/exports through Letters of Credit (LC) and Bank Guarantees (BG).

    • Corporate borrowings (External Commercial Borrowings - ECB).

    • Inward and outward remittances linked to employment and studies.

    • Currency conversion and Foreign Exchange (forex) business, which is a subset of international banking activities at branch level.

Regulatory Framework for Foreign Exchange in India

  • Acts governing forex:

    • FEMA (Foreign Exchange Management Act, 1999)

    • FCRA (Foreign Contribution Regulation Act), PMLA (Prevention of Money Laundering Act), Customs Act, Income Tax Act, SEZ Act.

  • Key differences between FERA and FEMA:

    • FEMA is enabling while FERA is disabling.

    • FEMA focuses on management of forex reserves, whereas FERA aimed to conserve them.

    • Violations under FEMA are civil, while FERA violations are criminal.

    • Under FEMA, the prosecution must prove violations, whereas under FERA, the accused had to prove innocence.

Key Regulatory Agencies in IB

  • Reserve Bank of India (RBI): Manages foreign exchange reserves and issues guidelines through AP (Dir) circulars and Master Directions.

  • Customs & DGFT: Manage import/export regulations, evaluate commercial transactions, and ensure compliance with international trade practices.

  • FEDAI: Assists in framing forex transaction rules, offers self-regulatory frameworks, and provides training for member banks.

  • International Chamber of Commerce (ICC): Establishes rules for international trade practices, including major publications like the UCPDC, ISBP, and INCOTERMS.

  • ECGC: Provides credit insurance to exporters and guarantees to banks for risks associated with overseas transactions.

Important Concerns in International Banking

  • KYC (Know Your Customer): Special emphasis on knowing not just the bank's immediate customers but also their counterparts in transactions.

  • TBML (Trade Based Money Laundering): Growing concern in cross-border trade focused on systemic under/over invoicing to evade taxes.

  • Sanctions: Enforced by entities like OFAC, restricting business operations with identified entities, particularly impacting banks under U.S. legislation.

India's Foreign Trade Overview

  • India operates under a trade deficit; imports exceed exports. Major imports include crude petroleum, gemstones, and electronics, while major exports are refined petroleum, gems, and engineering goods.

  • Foreign Trade Policy (FTP) 2023:

    • Aims to increase exports to $2 trillion by 2030.

    • Focuses on transitioning from incentives to tax remission and enhancing trade facilitation via technology.

    • Introduces initiatives to support districts as export hubs and streamline e-commerce exports.

Conclusion

This overview highlights the domain of International Banking, the regulatory framework of foreign trade in India, and the importance of adhering to specific guidelines to promote efficient international transactions.