CAC GGU IP PPT

Banking sector reforms & pathway towards fuller capital account convertibility : 

Banking sector reforms & pathway towards fuller capital account convertibility Presented by: (PROF.Deepak Tandon)

Convertibility ?? : 

Convertibility ?? Changing one currency into other for various purposes. capital account current convertibility account

Slide 3: 

“Capital Account Convertibility” means “the freedom to convert the local financial assets into foreign financial assets and vice-versa at market determined rates of exchange (floating exchange rate). It is associated with the changes of ownership in foreign/domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by the rest of the world. …” (Report of the Tarapore Committee on Capital Account Convertibility, RBI, 1997).

Slide 4: 

By CAC we mean that in respect of Capital flows,flow of portfolio capital,direct investment flows, flow of the borrowed funds and dividends and interest payable on them , a currency is freely convertible into foreign exchange and vice versa at the market determined Exchange rate. CAC to be only brought when the country’s Exchange rate is stable ,deficit in BOP is under control and FEX is available with RBI

Capital Account Transactions : 

Capital Account Transactions Borrowing /lending in foreign exchange in whatever form.  Export/import or holding of currency notes Transfer of immovable property outside India(other than lease less than 5 years) Acquisition of immovable property in India by a person outside India Giving a guarantee of debt/obligation by a person in India and owed to a person resident outside India.

Slide 6: 

Current account convertibility enables residents to make and receive trade-related payments - receive dollars, or any other foreign currency, for export of goods and services and pay dollars (or any other foreign currency) for import of goods and services.

OBJECTIVE OF STUDY : 

OBJECTIVE OF STUDY Is capital account convertibility beneficial an inevitable process? Will its implementation facilitate foreign companies to invest in India? Will the recommended phased implementation ensure smooth transition to a fully convertible regime? How banking sector can meet the challenges of full capital account convertibility? Whether economy will be exposed to unlimited access to short-term external commercial borrowing for meeting working capital and other domestic requirements? Will it provide unrestricted freedom to domestic residents to convert their domestic bank deposits and idle assets (such as, real estate), in response to market developments or exchange rate expectations? Whether India has reached a stage of final development when Full Capital account convertibility can be introduced?

BENEFITS : 

BENEFITS Convertibility would bring greater competition in banking. A legal channel for imports of gold-efficient market Availability of gold and gold related products across the country Efficient allocation of global capital More competition would therefore mean more death.

Tarapore committee & CAC : 

Tarapore committee & CAC Three phased adoption of CAC scheme: 2006-07 (Phase I) 2007-08 and 2008-09 (Phase II) 2009-10 and 2010-11 (Phase III)

CURRENT STATUS AS PER THE BENCHMARKS SET UP BY THE CAPITAL ACCOUNT COMMITTEE : 

CURRENT STATUS AS PER THE BENCHMARKS SET UP BY THE CAPITAL ACCOUNT COMMITTEE

Fiscal situation : 

Fiscal situation

Inflation : 

Inflation

Forex Reserves : 

Forex Reserves

NPAs of Public Sector Banks in India : 

NPAs of Public Sector Banks in India

STEPS STRENGTHENING BANKING SECTOR MAKING FAVORABLE CAC ENVIRONMENT : 

STEPS STRENGTHENING BANKING SECTOR MAKING FAVORABLE CAC ENVIRONMENT New private sector banks Reducing the Government or RBI stake in public sector banks to 33 percent from the level of 51 percent as per recommendations of Narasimham Committee on banking sector reforms 1998 Putting hold on transfership of ownership of SBI to the Government. Contd…

Contd.. : 

Contd.. Suggestion of linking the limit of overseas borrowing of banks to paid –up capital and free reserves in place of unimpaired Tier 1 from 25% to 50% of net worth in phase 1, 75% in phase 2 and 100 % in phase 3. Raising the ceiling of overseas investments by mutual funds from $2 billion to $5 billion in five years and removing NAV limits on MF overseas investments. Permitting non-resident corporate to invest in the Indian bourses through SEBI registered entities including mutual funds and portfolio management schemes.

Contd… : 

Contd… Allowing gold as tradable currency by developing an inter-bank cash/spot market in gold to activate inter-bank lending and borrowing in gold. The corporatization of all commercial banks, including public sector banks on common platform by bringing the banking system und.er one legislation

CAC AND BANKING : 

CAC AND BANKING Convertibility would bring greater competition in banking. More competition would therefore mean more death. Full capital account convertibility may encourage arbitrage operation. An enormous outflow of capital. An open capital account can lead to “the export of domestic savings” (the rich can convert their savings into dollars or pounds in foreign banks or even assets in foreign countries), which would curb domestic investment in developing countries. Entry of foreign banks can create an unequal playing field. Economic crisis.

Problems that the Banks could face post CAC : 

Problems that the Banks could face post CAC Volatility of the Interest Rates making risks complex and pricing will be made more difficult Exchange risk will be higher But, once full convertibility is achieved, investors in all asset classes (debt, equity, real estate) might have to bear additional bouts of volatility

Slide 20: 

SHOULD INDIA MOVE AHEAD ON THE ROAD OF REFORMS???.....

CASE STUDY –FOREIGN CURRENCY LOANS IN BANKS : 

CASE STUDY –FOREIGN CURRENCY LOANS IN BANKS Used where heavy requirement of Capital Equipments are involved Sources – Euro – markets, International Banks/ FI’s , Export credit agencies , World bank etc. Funds can be borrowed on Fixed or Floating basis

--Contd_ : 

--Contd_ Exporters have the option to avail of Preshipment and post shipment credit in FOREX from Banks at LIBOR plus a maximum 1.0 % point . To make Interest more competitive it is desirable to lower rates of FCL.

STEPS FOR FCL : 

STEPS FOR FCL Common Application Form is taken Letter of Intent given by Bank Capital Goods are clearance taken. Formalities of LC opening done. Payment to Overseas lending institution will be made by FI against the LC

TYPES OF FCL : 

TYPES OF FCL (A)Fixed Rate Borrowings --rate of interest is static throughout the scheduled time irrespective of the fluctuation e.g Buyer’s / supplier’s Credit / Trade Credit / Loans by the Commercial Banks . (B) Floating Rate Borrowings -- make advantageous to rates downward movement

DETAILS OF FCL : 

DETAILS OF FCL Rates – USD –3% over 6 month LIBOR -- EURO ---2.5% over 6 month LIBOR FOR ACQUISITION OF FIXED ASSETS -- For Expansion , Diversification, modernisation of units—SSI Sector Repayment – 5 Years with a moratium 1 year

--contd-- : 

--contd-- FOR WORKING CAPITAL PURPOSES ---Both indigenous and imported SSI Units and Export / Trading Houses Repayment – 5 years maximum

Slide 27: 

FCL to clients for Import Fundings for substituting the supplier’s credit to make the import transactions more profitable Rates – LIBOR +200/ 250 points( Bills >Rs50,000/-) RATES – LIBOR +Spread( As sanction)or 350 points whichever is higher

BOOKING OF LOAN \IMPORT PAYMENT UTILISATION : 

BOOKING OF LOAN \IMPORT PAYMENT UTILISATION A. Report to IBD H.O B. Take rate from IBD C. Debit –FCL –( USD converted RS Credit --- IBD ( OFE 126)

At The time of Repayment : 

At The time of Repayment Dr. --- Party’s account --- TT selling rate-Rs Cr ---HO IBD DR – IRSA ( Loan Interest ) Cr– FCL ( Principal ) Cr – Interest

DOCUMENTS TO BE TAKEN : 

DOCUMENTS TO BE TAKEN Request Letter Declaration FORM A1 LD4- Demand Pronote LD-13 ( Availment of FCL ) LTR 12 Trust receipt

FOR PRE/POSTSHIPMENT CREDIT IN FEX : 

FOR PRE/POSTSHIPMENT CREDIT IN FEX At present rate charged is LIBOR +75 basis. Charge 0.25 % at extension of FCL In case PC is in Foreign currency add 0.025% processing fees at the time of adjustment of PCFC A/c.

FOREIGN CURRENCY LOAN(Against FCNR (B) Funds) : 

FOREIGN CURRENCY LOAN(Against FCNR (B) Funds) A. Eligible borrowers Export earning units and other customers with 'AAA' or 'AA' credit rating. Customers with credit rating 'A', having natural hedge B. Purpose Working Capital. Demand Loan for purchase of new plant and machinery, acquisition of equipments and other assets C. Quantum Working Capital. Demand Loan for purchase of new plant and machinery, acquisition of equipments and other assets

-CONTD - : 

-CONTD - D. Tenor Working Capital - Min. 3 months, Max. 18 months.Conversion of existing rupee working capital facilities into FCL facility can be allowed.Demand Loans - Min. 12 months, Max. 36 months. E. Rate of Interest Interest rate linked to LIBOR + applicable spread based on credit rating, payable at quarterly intervals.* 1% p.a. of unutilized amount of FCL after 3 months of execution of documents.In case the sanction is requested to be revalidated, revalidation fee @ 0.25% of the entire sanctioned amount (maximum USD 5000/-) is applicable.PLUS High Processing Charges(Rs1.40lacs)

POST CAC SCENARIO : 

POST CAC SCENARIO FCL readily and freely available due to large funds availability to supplement domestic resources ,improved access to international markets and reduction of cost of capital .,Incentive for the Indian Importers and Exporters and hold the International assets and securities NO RBI APPROVAL S LIBOR = RBI Official Market Rate . No concept of loading of Basis points(All restrictions be removed )

NEGATIVES TO CAC W.R.T FCL : 

NEGATIVES TO CAC W.R.T FCL As there would be no restrictions for free flow of Foreign Currencies and Rupee in and Out , It might add to Money Laundering and Hawala and thus the provisos of FEMA200 be defeated. No K.Y.C norms can me strictly adhered to . Evasion of Taxation(Intra country) and systematic siphoning off capital from poor developing countries Not Only the Big Corporatesbut the ordinary citizens will be able to park their funds abroad through diversificationof the financial assets at their disposal at a cost of irreparable loss for the stared off investment sectors . (MaximiseWealth)

Slide 36: 

Thank You