The foreign exchange department is a highly specialized department in a bank. A wide variety of services are rendered by a foreign exchange department.
The functions of a foreign exchange department
Broadly, the functions of a foreign exchange department may be classified as:
1. Financing exports,
2. Financing imports,
3. Providing remittance facilities,
4. Dealing in foreign exchange, and
5. Furnishing credit information. .
1. Financing exports: The financial needs of the exporter right from the moment he conceives of the project and till he realizes export proceeds are provided by banks. The credit extended to the exporter to procure raw materials, process them and prepare them for shipment to the importer is known as packing credit or pre-shipment credit. On shipping the goods the exporter would draw a bill of exchange, with or without a letter of credit and discount it with the bank. The credit extended to the exporter after shipment is made is known as post-shipment finance. The exporter may be eligible to receive cash incentives from the Government on exports.
Finance may be made available by the bank against such entitlements. This may cover both pre-shipment and post-shipment stages. The advances to exporters, export being a preferred sector, are made at a concessional rate of interest. Banks get refinance on eligible advances. Besides financing, the other service rendered by banks to exporters is advising/confirming letters of credit drawn in favor of the exporters by their correspondents abroad. Even if the exporter does not require any financial accommodation from the bank, the exchange control regulations require him to receive the export proceeds only through an authorized dealer. Therefore, the export bills are to be collected through a bank. The bank may also execute guarantees on behalf of its export customers.
2. Financing imports: Letters of credit are issued by banks on behalf of their importer customers. The opening of the letter of credit by the bank, whereby, it undertakes to make payment to the exporter on shipment, enables the importer to conclude the deal with case. The importer may be financed by the bank for the imports This finance may take any form, cash credit or loan, as the case may be, and against hypothecation or pledge or mortgage of the stem imported. The exporter abroad is paid by the bank in foreign exchange. The bank may issue deferred payment guarantees on behalf of the importer for items purchased on terms of payment of price on a long-term basis. The import of goods into India is subject to the Import Trade Policy of the Government and exchange control regulations of the Central Bank of the country. The Bank takes care to see that they are adhered to.
3. Remittance facilities: An importer in Australia has to pay the overseas exporter. Similarly, an Australian exporter has to receive payment from abroad. A person in Australia may like to subscribe to a magazine published abroad. An Australian who is now employed abroad may like to remit funds for maintenance of his family in Australia. The payments into or from Australia can be arranged through any of the credit instruments. Briefly, the instruments may be described thus:
(a) Telegraphic Transfer. It is an instruction sent by the bank by telegram (i.e. by cable) to its branch at a foreign center or to its correspondent bank abroad to pay a certain sum to the person named therein. This is the quickest means of remittance and the beneficiary can obtain payment the very next day of remittance.
(b) Mail Transfer. This is similar to a telegraphic transfer with a difference that instead of the order being sent by cable it is sent through mail. As can be expected, there would be some delay, say, about a week or ten days, before the beneficiary can obtain payment.
(c) Bank Draft or Demand Draft: It is an order to pay a certain sum to a certain person or his order issued by the bank on its overseas branch or on its correspondent bank. The demand draft is handed over to the purchaser who sends it to the beneficiary. The beneficiary obtains payment on presentation to the bank on which the draft is drawn.
(d) Foreign Travelers Cheques. For the convenience of tourists, banks issue travelers cheques in major currencies of the world. They can be encashed at any bank in majority of countries. The traveler signs at one place in the travelers cheque while purchasing it. He is required to sign again on the travelers cheque before encashing bank. The encashing bank gets reimbursement by sending it to the issuing bank.
(e) Bill of Exchange: The exporter may draw a bill on the importer covering the export and sell the bill to the bank. The purchasing bank would send the bill to its overseas branch or its correspondent bank who would present it to the person on whom it is drawn. The purchasing bank’s account would be credited on realization of the bill. For the benefit of Indians residing abroad, banks open and maintain non-resident accounts.
4. Dealing in foreign exchange: Banks buy and sell foreign exchange from and to the public. To carry out this function banks have to keep sufficient stock of foreign exchange. These are kept in the form of bank accounts abroad. Banks maintain accounts with banks in important financial centers abroad through which all sales and purchases of foreign exchange are routed. For example, a foreign demand draft in pound-sterling issued by the bank would be made payable by the bank in London with which it maintains an account. On presentation of the draft in London, the bank’s account would be debited. Bank’s dealing in foreign exchange may sometimes necessitate it to sell to or buy from other banks in the place, or the Central Bank, the required foreign currency.
In India, subject to the rules and regulations of the Reserve Bank and Foreign Exchange Dealers’ Association of India, the bank has to quote a rate for the foreign currency to be purchased from and sold to the customer. Subject to these regulations the rate quoted would depend upon the rates prevailing in international markets and the bank’s margin of profit, etc. This section of the department in headed by a ‘Dealer’. It is the duty of the dealer to see that the bank maintains just adequate balance of each foreign currency and that the rate quoted to the customer is competitive and at the same time profitable to the bank.
5. Furnishing credit information: With a network of correspondent relationships with banks abroad, a bank in India is in a position to furnish business information to exporters and importers in India. The information may relate to the credit report on the prospective seller/buyer, market conditions, exchange control regulations in different countries, etc. The bank is also in a position to advise the customer of such other matter as the currency in which the transaction is to be designated, avoidance of exchange risk, etc.
Thus the foreign exchange department of a bank renders many useful services to exporters and importers. The bank should keep itself constantly updated and be in touch with the latest trend in international markets.