Foreign Exchange Department of Banks

The Foreign Exchange department, which is also being called as the International Banking Division, is one of the important departments of the banks operating in international market. In India also all scheduled commercial banks, both in the nationalized or non-nationalized sectors, do have Foreign Exchange departments, both at their principal offices as well as offices, in metropolitan centers. This department functions independently under the overall change of some senior executive or a senior officer well-versed in foreign exchange operations as well as in the rules and regulations in force from time to time pertaining to foreign exchange transactions advised by various government agencies.

The principal function of a Foreign exchange department is to handle foreign inward remittances as well as outward remittances; buying and selling of foreign currencies, handling and forwarding of import and export documents and giving the consultancy services to the exporters and importers. Besides this, the department also gives the financial assistance in relation to the foreign trade, i.e., it gives assistance to the exporters by way of financing the exports and imports by giving them the financial assistance to clear the consignments or open a letter of credit. The department issues letters of credit for their importer clients and handles letters of credit received from overseas correspondents in favor of exporters from India. Issuance of Performance and the Bid Bond guarantees and tender document is also one of the important functions of the banks that are dealing with foreign exchange business.

In India, the banks doing foreign exchange business are issued a license to this effect by the Reserve Bank of India under Foreign Exchange Regulation Act, 1973. No bank, not having such license to deal in foreign exchange, can handle foreign exchange operations. Besides Authorized Dealers, licenses are also issued to the Dealers with limited powers to change foreign currency notes, coins and travelers’ cheques. Such licensees are known as Authorized Money Changers.

Organization Structure of a Foreign Exchange Department

The foreign exchange department of a medium or large sized-bank can be divided into various department and sections such department are locked after by a senior person not lower than the category of a branch manager having both administrative and operational know-how as well as discretionary powers for advances required from time to time by the clients. The in charge of the department functions independently within the overall framework laid down by the Management of the bank. The in charge is assisted in hid day-to-day work by a team of officers, and workmen. One of the important functions of the Foreign exchange department, beside banking operations, is to maintain liaison and correspondence relations with overseas banks who may be their correspondents.

Section of the Foreign Exchange Department

The Foreign exchange department is divided into number of sections, each one equally important and looked after by one officer or a department head. A particular section can be sub-divided into sub-section with specific duties allotted. The sections in Foreign exchange department can be broadly stated as under:

1. Dealers’ Section

This section is the nerve of the foreign exchange department as the exchange rates are computed and advised by this section. The exchange rates are the on a foreign exchange and so any incorrect fixation of rates (price) will turn the profits of the bank into losses and instead of earning from the foreign exchange transactions, the bank may keep on losing. This section is headed by an officer who is called a Dealer. In the morning, before the banking hours begin, the exchange rates of various currencies are computed. The exchange rates are computed on the basis of certain fixed principles which may by either market quotations or any such approved channel. In India, the Dealer works out the exchange rates on cross rate method based on the sterling rate schedule fixed and advised by FEDAI vis-à-vis the previous day’s closing rates in London market. This department calculates and advised both the ready rates as well as forward rates as and when requested. Besides rate computation, it also looks after the foreign currency accounts of the bank and supervises the balancing position in foreign currency accounts maintained abroad. It also controls the exchange position of the department and reconciles the various entries put forth by other sections both for buying as well as selling of foreign exchange. In addition, the section also calculates and tabulates the statistical data required by the principal office of the bank concerned, as well as the Exchange Control Department of the Reserve Bank of India. Such statistics prepared by the bank are to be reported to the authorities on the prescribed forms at the prescribed intervals. This data is very essential and of prime important as the Balance of Trade and Balance of Payments position is arrived at only from the statistics provided by the banks. From the data available from the banks even the import policy is formed and other fiscal fiscal measure adopted by the monetary authorities from time to time depend.

This section can be further sub-divided into following subsections:

  1. Rate calculation and advising
  2. Forward Exchange contracts
  3. Foreign currency Accounts
  4. Exchange position and control, and
  5. Reconciliation of Foreign Currency Accounts.

2. Foreign Remittances Section

This section deals with the inward and outward remittances received in the country and sent outside, both on behalf of the transactions taken up by residents and non-residents. Foreign remittances are carried out in the form of cable transfers, mail transfers, demand drafts, travelers cheques and payment instructions by letters. All these forms are widely used both for inward remittances as well as outward remittances. The officer of this particular department has to be quite well-versed with various  regulations in force from time to time and the amendments thereto as strict exchange control regulations are prevailing specially in case of outward remittances in developing and underdeveloped countries, due to the adverse balance of payments position, depleting foreign exchange reserves, and available resources required to meet with development programmes and national exigencies. This department also keeps Test Key arrangements used for transmitting the instructions by cable, as in cable transfers no signature of the remitting bank is possible. So messages are computed with a particular number known as code or cipher. This code or cipher is recomputed at the other center on the basis of the test arrangements exchanged between the two banks.

In foreign exchange, whatever the reason may be irrespective of the amount, the entire gamut is focused around the inward and outward remittances and so this section is of prime importance. The remittances are converted into local currency in case of inward remittances and in foreign currency in case of outward remittances at the prevailing  rate of exchange on the date of each transaction or a forward exchange rate if exchange rate if exchange is already booked earlier. So, the remittance department has to keep a close contact with Dealer’s section, both for getting the rates and also advising them the funds position which changes from  time to time due to  the remittances flowing in  either direction.

3. Import Section

Import section can be sub-divided into import letters of credit both opening and payment thereof, issue of Bid guarantees, performance guarantees and guarantees to Government agencies for release of import consignment, import documents received on collection basis and imports on consignment basis. Import section has to keep in touch with latest developments in international markets as well as the rules and regulations in force in various centers to take up the import  business at right earnest without violating the rules and regulations. Both in developing and developed countries, there are Import and Export Trade Control Regulations and such regulations are enforced through a licensing procedure. Hence the Import section has to take care of the Import Trade Control Regulations as well as Exchange Control Regulations before allowing import transactions to be put through.

4. Export Section

The section deals with various exchange operations arising out of export  trade. The principal functions of this sub-section are:

  1. Advising and confirming letters of credit received from abroad:
  2. Extending financial assistance to exporters as and when required.
  3. Acting as an agent for collection on behalf of the clients;
  4. Negotiation of export bills  drawn under letters of Credit whereby the dealer acts as an agent of overseas bank and facilitates smooth function/operation of international trade; and
  5. Acting as an authorized channel appointed by Central Banking Authority to receive the export proceeds.

5. Statistics Section

This section collects the sales and purchase figures from various departments along with necessary exchange control forms, tabulates then and submits a periodical report  by way of statements and returns to the Exchange Control Department of the Reserve Bank of India under whose authority it operates. This reports is also being submitted from time to time in one form or the other to the head office of the concerned bank to enable it to compile the overall position of the foreign exchange preferably of the bank as a whole.

Source: International Finance Notes-MGU

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