CASE STUDIES / CASELETS ON INTERNATIONAL BANKING

Case 1

On Jan 10, 2012, the Mumbai branch of popular bank entered into following foreign currency sale and purchase transactions:
(1) With Mr. A for sale of USD 2000 to be delivered on the Jan 10.
(2) With Mr. B for purchase of USD 2000 to be delivered on Jan 11.
(3) With Mr. C for purchase of USD 2000 to be delivered on Jan 14 (Jan 12 and 13 being bank holidays)
(4) With Mr. D for sale of USD 2000 to be delivered on Feb 11.
The inter-bank foreign currency rates on Jan 10, 2012 are as under: Cash rate or ready rate USD = Rs.45.50/60, Tom rate Rs.45.55/65, Spot rate Rs.45.60/70 and one month forward rate Rs.45.80185.
On the basis of above, answer the following questions.

1 What rate will be used for the transaction with A and what amount in Rupees will be involved:
a) Rs.45.50, Rs.91000
b) Rs.45.55, Rs.91100
c) Rs.45.60, Rs.91200
d)     Rs.45.65, Rs.91300


2 What rate will be used for the transaction with B and what amount in Rupees will be involved:
a) Rs.45.50, Rs:91000
b)     Rs.45.55, Rs.91100
c)     Rs.45.60, Rs.91200
d)     Rs.45.65, Rs.91300


3 What rate will be used for the transaction with C and what amount in Rupees will be involved:
a)   Rs.45.50, Rs.91000
b)   Rs.45.55, Rs.91100
c)   Rs.45.60, Rs.91200
d)   Rs.45.65, Rs.91300


4. What rate will be used for the transaction with A and what amount in Rupees will be involved:
a)   Rs.45.50, Rs.91000
b)   Rs.45.55, Rs.91100
c)   Rs.45.60, R-6:91200
d)   Rs.45.65, Rs.91300

Ans. 
1-c
2-b
3-c
4-d 
Explanations:
1. It is a sale transaction. Hence, same day rate i.e. cash rate of Rs.45.60 will be used. The amount =-45.60 x 2000 = Rs.91200
2. It is a purchase transaction. Hence, next day rate (TOM Rate) of Rs.45.55 will be used. The amount = 45.55 x 2000 = Rs.91100
3. It is a purchase transaction. Hence, 3ffi day rate (Spot Rate) of Rs.45.60 will be used. The holidays period will be excluded from counting. The amount = 45.60 x 2000 = Rs.91200
4. It is a forward sale transaction. Hence forward sale rate or Rs.45.85 will be used. The amount = 45.85 x 2000 = Rs.91700

Case 2

An exporter submitted an export bill of USD 100000 drawn on 120 days usance basis from date of shipment, which took place on Aug 03, 2012. The following further information is provided:
(1) The due date is Dec 01, 2012.
(2) Theexchangemarginis 0.20%.
(3) Spot inter-bank USD rate is Rs.45.00/05.
(4) Premium spot Nov 0.40/45
(5) Rate is quoted to nearest 0.25 paise and rupee amount to be rounded off
(6) Interest rate is 8% for period up to 180 days.
(7) Commission on bill purchase is 0.50% Answer the following questions.

1 What is the rate at which the bill will-be purchased if it is a demand bill after adjustment of bank margin, without taking into account, the premium?

a) Rs.44.91
b) Rs.45.09
c) Rs.45.31
d) Rs.45.51

2 What is the rate at which the bill will-be purchased if it is a demand bill after adjustment of bank margin and the premium? -
a) Rs.44.91
b) Rs.45.09
c) Rs.45.31
d) Rs.45.51

3 What is the gross amount before application of interest and commission:
a) R5.4531000
b) Rs.4410174
c) Rs.4407908.50
d) Rs.4507909

4 What is the amount of the bill without bank commission
a) Rs.4531000
b) Rs.4410174
c) Rs.4407908.50
d) Rs.4407909

5 What amount will be credited to exporter's account:
a) Rs.4531000
b) Rs.4410174
c) Rs.4407922.50
d) Rs.4407909


Ans. 

1-a 
2-c 
3-a 
4-b 
5-d 

Explanation  :
1. Calculation of buying rate will be as under:
Spot rate Rs.45.00 (buying rate will be applied as it is purchase) Less 0.20% margin Rs.00.09 Rate Rs.44.91

2. Calculation of rate will be as under:
Spot rate Rs.45.00 (buying rate will be applied as it is purchase) Less 0.20% margin Rs.00.09 Rate Rs.44.91 Add premium Rs.00.40 (premium will be added as that benefit will be of the customer)    Rate Rs.45.31-

3. Calculation of rate will beasunder:
Spot rate Rs.45.00 (buying rate will be applied as it is purchase) Less 0.20% margin Rs.00.09 Rate  Rs.44.91 Add premium Rs.00.40 (premium will be added as that benefit will be of the customer) Rate Rs.45.31 Amount in Rs. 45.31 x 100000 = 4531000

4. Calculation of rate will be as under:
Spot rate Rs.45.00  Less 0.20% margin        Rs.00.09 Rate Rs.44.91 Add premium Rs.00.40 Rate Rs.45.31--  Gross Amount in Rs. 45.31 x 100000 = 4531000 Interest 120 days @ 8% Rs.120826 Amount  4531000 — 120826 = 4410174

5. Calculation of rate will be as under:
Spot rate Rs.45.00 Less 0.20% margin Rs.00.09
Rate Rs.44.91 Add premium Rs.00.40
Rate Rs.45.31 Amount in Rs. 45.31 x 100000 = 4531000 Interest 120 days @ 8% Rs.120826 Commission at 0.05% Rs.2265.50—
Amount to be credited 4531000-120826 - 2265.50 = 4407908.50 (rounded to Rs.4407909).

Case 3

Your export customer has received an advance of US 10000 against export to UK, which the importer in UK has got credited to NOSTRO account of the bank in London. The current inter-bank market rate USD = 45.10/15. Bank retains a margin of 0.15% on purchase and 0.16% on sale. What amount will be credited to customers account:
a.   Rs.451676.50 
b. Rs.450323.50
c.  Rs.451721.60 
d. Rs.450278.40

Ans.1-b

Explanations:
1: It is a purchase transaction for the bank. Hence inter-bank purchase rate of Rs.45.10 will be used. Bank will deduct the purchase margin of 0.15%. Gross amount = 45.10 x 10000 = 451000:
Net amount which will be credited to customer's account = 451000 - 676.50 (0.15% margin) = 450323.50

Case 4

A customer wants to book the following forward contracts:
(1) Forward purchase of USD 50000 for delivery 31.d month

(2) Forward sale of USD 50000 for delivery 2nd month. Given spot rate = 45.1000/45.1200. Premium = 1 m - 0800/0900, 2m - 1700/1900 and 3 m - 2800/2900. Exchange margin = for purchase - 0.20% and for sale - 0.25%.

1 What is the rate for forward purchase transaction:
a) 45.4233
b) 45.2705
c) 45.1795
d) 45.1700


2 What is the rate for forward sale transaction:
a) 45.4233
b) 45.3243
c) 45.4882
d) 45.3456

Ans. 
1-c 
2-a 

Explanations:
1. For purchase the spot rate = 45.1000
Add 2 m premium = 00.1700 (premium for 2 months only to be added in purchase as bill may be given on any day of 3'd month including on 13t day) Total = 45.2700
Less margin of 0.20% = 00.0905 Rate = 45.1795

2. For sale the spot rate = 45.1200 Add 2 m premium  = 00.1900 (premium for full period of 2 months only to be added in sale) Total = 45.3100    Add margin of 0.25% = 00.1133  Rate = 45.4233

Case 5

Following are the Inter bank quotes on a certain date: Spot USD 1NR 44.60/65 1 month 8/10   2 month 18/20  3 month 28/30 Spot GBP USD 1.7500/7510 1month 30/20 2-month 50/40 3month70/60 All the above differences are for the month and fixed dates and the bank margin is 3 paise.

01 An exporter has presented an export demand bill (sight document) for USD 300000 under irrevocable letter of credit. What will be the rate at which the documents will be negotiated?

a) 44.5700
b) 44.6000
c) 44.6500
d) 44.6800

02- An Exporter has submitted 60 days usance bill for USD 25000 for purchase. At what rate the document will be purchased?
a) 44.7500
b) 44.7800
c) 44.8400 '
d) 44.8700

3 Your bank has opened a letter of credit for import at the end of 2 months for GBP 30000. At what rate, the forward exchange will be booked?
a) 78,4700
b) 78,4725
c) 78,6300
d) 78,6325


4 If the exchange margin is 3 Paise for buying as well as selling, what is the bank's spread in % on customer transaction?
a) 0.2465
b) 0.3000
c) 0.6000
d) 0.6275


5 A customer tenders export bill for GBP 10,00,000 payable 45 days from sight. The transit period is 15 days he wants to retain 10% of bill value in the foreign currency. Bank's margin is 10 paise. What will be credited to customer's account?
a) 71310030
b) 70317630
c) 70110270
d) 70018510

Ans. 
1-a
2-a
3-b
4-a
5-b 

Explanations:
1. It is a demand bill which means the payment is immediate upon negotiation. So, spot rate will be applied, which is USD/INR SPOT 44.60/44.65.
Being an export bill, from bank's point of view, it is a buying transaction. Hence Buying (Bid) Rate of 44.60 (and an inter-bank rate) will be applied. To arrive at the customer rate, the margin will be deducted.
inter Bank Rate 44.6000 Less : Margin 00.0300 Customer Rate 44.5700

2. The payment terms in this case are 60 days usance. Hence, 2 months forward rate will be applied, which will be calculated as under:
Spot USDIINR 44.6000/44.6500 Forward 2 Months 00.1800100.2000 (small/Big> Premium >Add) Total 2 Months   44.7800/44.8500 Being an export bill, from bank's point of view, it is buying of FC. Hence Buying (Bid) Rate will be applied, which is 44.78. To arrive.at the customer rate, exchange margin will be deducted. Inter Bank Rate 44.7800 Less: Margin 00.0300
Customer Rate  44.7500

3. The fetter of credit is for 2 months. Hence, 2 months forward rate will be a applied which will be calculated on the basis of 2 Months GBP/INR rate through a cross rate (GBP/USD and USD/INR rates).
USD/INR SPOT 44.6000/44.6500 Forward 2 Months 00.1800/00.2000 (Small/Big-> Premium->Add) Total 2 Months 44.7800/44.8500    GBP/USD SPOT 1.7500/1.7510
Forward-2 Months 0.0030/0.0020 (Big/Small-> Discount ->Less)   Total 2 Months 1.7470/1.7490
It is an import transaction and from bank's point of view, it is selling. Hence selling (offer) Rate will be applied. GBP/INR = GBPIUSD x USD /INR = 44.8500 X 1.7490  = 78.44265
This is an inter-bank rate. To arrive at the customer rate, exchange margin will be added.
Inter Bank Rate 78.4427   Add: Margin  00.0300   Customer Rate 78.4727 rounded to 78.4725

4. USDANIR Spot 44.6000/44.6500 inter Bank Buying Rate 44.6000 Less: Exchange Margin 00.0300   Merchant Buying Rate    44.5700 Inter bank Selling Rate  44.6500  Add: Exchange Margin          00.0300
Merchant Selling Rate   44.6800
% Spread = ((Selling Rate-Buying Rate) X 100)1 /{(Selling Rate + Buying Rate)/2}
=((44.68-44.57)X100))/{44.68+44.57)/21   = 00.11 X 100/44.625 = 0.2465 %

5. The Bill period is 45 Days. The transit period is 15 Days.
Total period is 2 months. Hence, 2 months forward rate will be applied. 2 Months GBP/INIR rate is required for which cross-rate will be calculated.
USD/INR SPOT 44.6000/44.6500 Forward Points 2 Months 00.1800/00.2000 (Small/Big-> Premium -> Add) Spot 2 Months 44.7800/44.8500  GBP/USD SPOT 1.7500/1.7510
Swap Points 2 months 0.0030/0.0020 (Big/Small-> Discount->Less)  Outright 2 Months 1.7470/1.7490 Being an export from bank's point of view, it is Buying. Hence Buying (Bid) Rate will be applied).
GBP/INRBID = GBP/USDBID X USD/INRSID = 44.7800 X 1.7470 = 78.2307
This is an inter-bank rate. To arrive at the Customer Rate, Exchange margin will be deducted. Inter Bank Rate 78.2307 Less: Margin 00.1000  Customer Rate 78.1307
The bill is for 10,00,000 GBP. Of this, the customer wants to retain 10% in EEFC account. Hence he would be converting 9,00,000 GBP.For 9,00,000 GBP, his account would be credit with = 78.1307 X 900000 = Rs.70317630

Case 6

An importer customer, wants to retire an import bill of Pound Sterling 100000 drawn under letter of credit opened by you, and payable on demand on Oct, 12.2012. The TT margin is 0.10%. The inter-bank rates are GBP/USD =1.5975/1.6000 and USD/1NR = Rs.44.90/45.00. On the basis of given information, answer the following questions.

1 What rate will be quoted by the bank for this transaction in terms of GBP/INR without taking into account the TT margin:
a) Rs.71.7276
b) Rs.71.9085
c) Rs.72.0000
d) Rs.72.0720


2 What rate will be-quoted by the bank for this transaction in terms of GBP/1NR after taking into account the TT margin:
a) Rs.71.7276
b) Rs.71.9085
c) Rs.72.0000
d) Rs.72.0720


3 What amount will be debited to cash credit or overdraft or current account of the customer for retirement of this bill:
a) Rs.7000000
b) Rs.7207200 
c) Rs.7218300
d) Rs.7222070


4 If this bill is not retired by the importer customer, the crystallization of this import bill will be on which of the following dates:
a) Oct 12, 2012
b) Oct 21, 2012 
c) Oct 22, 2012
d) Nov 12, 2012


Ans. 
1-c
2-d
3-b
4-c 

Explanations:
1. This is a sale transaction for the bank. Bank will purchase pounds (GBP) at market selling rate and will sell the USD to the customer to purchase pounds. The rate taken will be 1.6000 and 45.00. Hence the GBP/INR = 1.6000 x 45.00 = 72.00. Further bank will add margin of 0.10% which will be 0.0720. The total rate = 72.00 + 0.720. The customer would pay = 72.072 x 100000 = Rs.7207200

2. This is a sale transaction for the bank. Bank will purchase pounds (GBP) at market selling rate
and will sell the USD to the customer to purchase pounds. The rate taken will be 1.6000 and 45.00. Hence the GBP/INR = 1.6000 x 45.00 =
72.00. Further bank will add margin of 0.10% which will be 0.0720. The total rate = 72.00 + 0.720= 72.072.

3. This is a sale transaction for the bank. Bank will purchase pounds (GBP) at market selling rate and will sell the USD to the customer to purchase pounds. The rate taken will be 1.6000 and 45.00. Hence the GBP/1NR = 1.6000 x 45.00 =
72.00. Further bank will add margin of 0.10% which will be 0.0720. The total rate = 72.00 + 0.720. The customer would pay = 72.072 x 100000 = Rs.7207200

4. The bill is to be paid on demand Le. Oct 12, 2012. As per FEDAI rule, where the demand import bills drawn under LC are not retired on demand, these are required to be crystallized within 10 days from the date of demand. Hence the latest date by which it should be crystallized is Oct 22, 2012. (For usance import bills the crystallisation will be done on due date.

Case 7

On Apr 15, 2012, XYZ Ltd expects to receive USD 20000 within July 2012. The company wants to book a forward contract for July 2012. The USD/1NR inter-bank spot rate is Rs.45.10/20. The forward premium is 18/20 paise for May, 31/33 for June and 45/47 for July. The margin to be retained by the bank is 0.10 paise per USD.

1 What is the FC rate at which the forward contract will be booked if the margin is not taken into account:
a) Rs.45.31
b) Rs45.41
c) Rs.45.55
d) Rs.45.57


2 What is the FC rate at which the forward contract will be booked if the margin is taken into account
a) Rs.45.31
b) Rs45.41 
c) Rs.45.55
d) Rs.45.57

Ans. 
1-b
2-a 

Explanations:
1. For calculating the forward, the bank will take into account the forward premium for June as amount can be received
on any day in July including ft July. Thus the premium amount is 31 paise. The rate would be:
Spot rate = 45.10 Forward premium for June = 00.31 (premium for July will not be paid as delivery is during July) Total = 45.41

2. For calculating the forward, the bank will take into account the forward premium for June as amount can be
received on any day in July including 1st July. Thus the premium amount is 31 paise. The rate would be: Spot rate   =  45,10
Forward pre=  00.31
Total =  45.41
Less =  00.10 Rate to be =  45.31

Case 8

The importer requests on Sep 01, 2012 to book a forward contract for payment of an import bill of USD 50000 due for Dec 15, 2012. Spot rate USD/INR = 45.10/20. Forward premium for Sep 10/14 paise, Oct 22/24 paise, Nov 33/35 paise, Nov to Dec 15-12/14 paise. Bank is to charge margin of 0.20%.

01 Without taking into account the margin, the rate that will be quoted by the bank is :
a) Rs.45.2000
b) Rs.45.5500
c) Rs.45.6900
d) Rs.45.7814

02 By taking into account the margin, the rate that will be quoted by the bank is :
a) Rs.45.2000
b) Rs.45.5500
c) Rs.45.6900
d) Rs.45.7814

Ans. 
1-c
2-d 

Explanations:

1. This is FC sale transaction. Hence bank will use the Spot rate = 45.20. and premium up to Dec 15, will be added. The rate would be:45.20 margin of 0.20% i.e. 0.09138 is added, the rate would be = 45.7814.
2. This is FC safe transaction. Hence bank will use the Spot rate = 45.20. and premium up to Dec 15, will be added. The rate would be:45.20 margin of 0.20% i.e. 0.09138 is added, the rate would be = 45.7814.

To calculate the rate Nov premium
+ 0.35 + 0.14 = 45.69. When the
To calculate the rate Nov premium
+ 0.35 + 0.14 = 45.69. When the

Case 9

Your correspondent bank in UK wants to credit Rs.50 million in its NOSTRO account maintained by you in New Delhi. The bank is ready to credit the equivalent USD in you NOSTRO account in London. The inter-bank rate is USD rate is Rs.45.10/15. If exchange margin is ignored, how much amount, the correspondent bank will credit to the NOSTRO account in London and at what rate.

a 1108647.45
b. 1107419.71
c 1107022.13
d. inadequate information to make the calculation.

Ans. 
1-a

Explanations:
For the bank, it is a purchase transaction as bank is purchasing dollar and giving rupee. Hence the rate that will be applicable is Rs.45.10. The FC value of Rs.50 million = 50000000/45.10 = 1108647.45.

Case 10

M/s XYZ imported goods worth Japanese Yen (JPY) 50 million. They request to remit the amount. The USDANR rate is Rs.45.1500/1700 and USD/JPU is 91.30/50. The bank will load a margin of 0.20%.

1 What rate will be quoted (per 100 yen)?
a) Rs.49.0456
b) Rs.49.4743
c) Rs.49.5730
d) Rs.49.8712

2 What amount the importer has to pay in Indian currency?
a) Rs.2472100
b) Rs.2478500
c) Rs.2428400
d) Rs.2408300

Ans. 
1-c 
2-b 

Explanations:
1. JPY is to be sold against rupees for which no direct rate is available. It will be calculated as a cross rate. Bank need to buy JPY against USD and USD against rupees. Hence the following rate will be used for USD/INR 45.1700 (the market selling rate) and for USD/JPY 91.30 (the market selling rate being lower in this case). Rate = 45.1700/91.30 = 0.494743 and for JPY 100 the same will be Rs 49.4743 (As per FEDAI Rules, JPY is quoted as per 100 yen)

2. JPY is to be sold against rupees for which no direct rate is available. It will be calculated as a cross rate. Bank need to buy JPY against USD and USD against rupees. Hence the following rate will be used for USD/INR 45.1700 (the market selling rate) and for USD/JPY 91.30 (the market selling rate being lower in this case).
Rate = 45.1700/91.30 = 0.494743 and for JPY 100 the same will be Rs 49.4743 (As per FEDAI Rulet, JPY is quoted as per 100 yen).
To this margin of 0.20% will be added which works out to 0.0989. Hence the rate will be 49.4743 + .0989 = 49.5732 rounded of to 49.5730 Total Rupee payment = 5,00,00,000 x 49.573/100= 24786500

Case 11

Bank had booked a forward purchase contract 3 months back at Rs.45.60, for delivery 3 days later for USD 10000. Due to delay in realization of export bill, the customer has requested-for cancellation of the contract and re- book it for one month fixed date or option contract beginning one month from spot date. The inter-bank spot rate is 45.2000/2200. One month forward premium is 0800/1000 paise. The TT selling and buying margin 0.20%

1 What will be the rate at which the contract will be cancelled:
a) 45.2200
b) 45.2000
c) 45.3104
d) 45.3908

2 What amount will be debited or credited to customer account being difference:
a) Rs.3202 debited
b) Rs.3202 credited 
c) Rs.2996 credited
d) Rs.2996 debited

03 At what rate, the contract would be re-booked:
a) 45.2200
b) 45.2000
c) 45.3104
d) 45.3908


Ans. 
1-c 
2-c 
3-c 

Explanations:

1. The contract will be cancelled at TT selling rate i.e. 45.2200+0.20% margin i.e 0.0904 = 45.3104 The amount at contracted rate of 45.60 = 45.60 x 10000 = 456000 The
amount at cancelled rate of 45.3104=453104
Difference = Rs.2996, which would be credited to customer account.

2. The contract will be cancelled at TT selling rate i.e. 45.2200+0.20% margin = 0.0904 = 45.3104 The amount at contracted rate of 45.60 = 45.60 x10000 = 456000 The
amount at cancelled rate of 45.3104=453104
Difference = Rs.2996, which would be credited to customer account.

3. For booking of contract, the spot rate = 45.2000 Add one month premium = 00.0800
Total = 45.2800
Less inter-bank margin at 0.20% = 00.0905 Rate = 45.1895

FOREX RISK MANAGEMENT

Case- 12

international Bank successfully contracted an FCNR (B) deposit of 10 million USD for a period of 5 years. Out of these funds, the bank retains USD 4 million as deposit with a high rated US bank in its NOSTRO account and converts the remaining amount to Indian currency at prevailing USD rate = Rs.46. On the basis of the given information, answer the following questions:

01  f the foreign currency rate moves to Rs.46.50:
a) the bank.will gain Rs. 3 mio (million) 
b) the bank will lose Rs. 3 mio (million)
c) the bank will gain Rs.6 mio (million)
d) the bank will lose Rs.6 mio (million)


02 What type of position the bank is having presently after this transaction?
a) an oversold position of USD 4 million
b) an oversold position of USD 6 million
c) an overbought position of USD 6 million
d) an overbought position of USD 6 million


3 If the foreign currency rate moves to Rs.45.00:
a) the bank will gain Rs. 3 mio (million)
b) the bank will loss Rs. 3 mio (million)
c) the bank will gain Rs.6 mio (million)
d) the bank will loose Rs.6 mio (million)


4 The square its position, the bank will have to undertake which of the following transaction?
a)   Acquire USD assets of at least USD 6 million
b) Acquire USD assets of at least USD 4 million
c) Acquire USD liabilities of at least USD 4 million
d) Acquire USD liabilities of at least USD 6 million

5 If the bank decides to invest the amount received as FCNR deposit in a 3-year US govt. security at 6 months LIBOR related rate of interest, the bank faces the following type of risk?
a)  foreign exchange risk
b) liquidity risk
c) basis risk
d) no risk


Ans- 
1 - b  
2 - b  
3 - c  
4 - a  
5 - c

CASE STUDIES ON LETTER OF CREDIT

Case 1

M/s Exports Private Limited have received a letter of credit for export-of textile items for an amount of $ 50000 approximately. The company manufactured the goods, made the shipment and presented the documents for negotiation to the negotiating bank for a total invoice value of $ 52356. The negotiating bank refused to negotiate the document as the amount exceeded the amount of letter for credit. What is the position of exporter in the given situation:

a) Negotiating bank has all discretion to point out any discrepancy. Hence, it need not pay.
b) The discrepancy pointed out by the negotiating bank is not correct. Hence it should pay.
c) The negotiating bank should seek advice of the opening bank in such matters
d) The information given is incomplete to take a decision.

Answer:
Solution : The decision of the negotiating bank in refusing to negotiate. the documents on the basis of variation in the amount is not correct. As per Article 30 of Uniform Customs and Practices for Documentary Credits 600, the words "about" or "approximately" used in connection with the amount of the credit or the quantity or the unit price stated in the credit, are to be construed as allowing a tolerance not to exceed 10% more or 10% less, than the amount, the quantity or the unit price to which they refer.
Hence the amount stated in the invoice is well within the tolerance of 10% and objection raised by the bank is not correct.

Case 2

M/s Exports Private Limited received a letter of credit for export of certain products but the letter of credit does not state the quantity in terms of a stipulated number of packing units or individual items. The exporter manufactured the goods and presented the documents for negotiation which have been negotiated by the negotiating bank. However, the opening bank refused to honour the documents on the premise that there is variation of around 3 percent in the quantity of goods supplied. The negotiating bank demands the return of money from the exporter. What is the exporter's position in this case:

a) Once the documents have been found correct, the negotiating bank cannot ask for refunds of the money from the beneficiary
b) If the applicant refuses to pay, the beneficiary will have to return the money
c) The objection raised by the opening bank is justified and this should have been seen by the negotiating bank before hand
d) The opening bank's objection is not justified and it has to pay the documents


Answer:
Solution: The demand of the negotiating bank for refund of the money from the exporter is not justified. As per provisions of Artide 30 of Uniform Customs and Practices for documentary Credits (UCPDC-600), a tolerance not to exceed 5% more or 5% less than the quantity of the goods is allowed, provided the credit does not state the quantity in terms of a stipulated number of packing units or individual items and the total amount of the drawings does not exceed the amount of the, credit. In the given case, the quantity variation falls within the tolerance level. The negotiating bank, instead of seeking refund fro-m the exporter should take up the matter with the issuing bank for payment.

Case3

International Bank, New Delhi received a letter of credit issued by a bank in UK in favour of M/s Exports Private Limited, a customer of International Bank. The negotiation is restricted to International Bank. On the date of receipt of LC, riots took place in the locality Where the branch of the bank is located. As a result the LC could not be advised by the bank to the exporter immediately. Later on when the situation became normal the bank advised the LC to the exporter but by that time the expiry date for negotiation of documents had expired. The exporter insists on negotiation of documents by the International Bank, as delay is not on the part of the exporter but on the part of International Bank. What is the position of the International Bank vis-à-vis the exporter in the given situation:

a) International Bank is liable due to which it should negotiate the documents
b) Exporters Pvt Limited has the right to get the payment of the documents
c) International Bank is not liable
d) Given information is not enough to take any decision

Answer: c

Solution: The insistence of the exporter to negotiate the documents is not correct when the date of negotiation of the LC has expired. As per Article 36 of Uniform Customs and Practices for Documentary Credits (UCPDC 600), a bank assumes no liability or responsibility for the consequences arising out of the interruption
of its business by acts of God, riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes.or lockouts or any other causes beyond its control. A bank will not, upon resumption of its business, honour or negotiate under a credit that expired during such interruption of its business. Under the given circumstances, the bank has no obligation to negotiate the documents and make .the payment since the credit has-expired. The beneficiary has to get the negotiation date extended by amendment of the LC.

Case 4

M/s Exports Private Limited have received a letter of credit in their favour for export of certain goods to UK. The date of expiry of the credit is around 31st December 2011. Since the process involved in manufacturing of goods was little longer, the exporter could present the documents for negotiation on 3rd January 2012. The documents were negotiated by the negotiating bank under reserve to which the exporter objected. In the opinion of the exporter, there is no deficiency in the documents and in the opinion of the bank, the documents have not been presented for negotiation in time. What is the position of the bank and the exporter:

a) Bank has to negotiate the documents as it gets 5 banking days to check the documents and the documents have been presented during that period.
b) The beneficiary has the right to present the documents within 5 calendar days since date is written as around Dec 31. Hence, the negotiating bank cannot refuse payment
c) The bank is not under obligation to negotiate the document as the last date for negotiation is over
d) The bank should seek instruction of the opening bank and applicant and move accordingly.

Answer:
Solution: The stand taken by the bank that the documents have been presented after expiry date, is not correct. As per Article 3 (Interpretations) of Uniform Customs and Practices for Documentary Credits (UCPDC 600), the expression 'ton or about" or similar, will be interpreted as a stipulation that an event is to occur during a period of five calendar days before until five calendar days after the specified date, both start and end dates included. The documents have been presented by the exporter within 3 calendar days after the specified date i.e. Dec 31, 2011. Hence, the bank should negotiate the documents if otherwise in order.

Case 5

Popular Bank issued an LC of USD 50000 on Jan 05, 2012, in favors of John and John of London. The last-date for shipment is Jan 15 and last date for negotiation is Jan 31, 2012. The goods were shipped on Jan 02, 2012 and documents were presented for shipment by the beneficiary for negotiation to South Hall Bank on Jan 14, 2012, which were negotiated on Jan 16, 2012. When the documents were sent to Popular Bank for reimbursement by the South Hall Bank, the opening bank found the following discrepancies:

1. The date of shipment as Jan 02, 2012 while the date of LC was Jan 05, 2012.

2. The  date  of  invoice  was  Jan  03 ,  2012  and  date  of  packing  list  and inspection certificate  was  Dec  31 ,  2011 .  The  opening  bank  returned  the documents  to  the  negotiating  bank .

a) The return is not justified due to which the negotiating bank should send the documents back to opening bank for payment
b) The return is justified, as the date of LC is subsequent to date of documents
c) The return is justified, as the date of different documents is different
d) The opening bank should seek opinion of the applicant and then take decision

Answer: a

Solution: The discrepancies pointed out by the opening bank are not justified. As per Article 14 of UCPDC 600, the documents under an LC can be dated prior to the date of LC but these should not be dated later than the date of presentation. Further, Data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit. Therefore, if the documents do not carry any other discrepancy, the opening bank or the applicant cannot refuse payment, on this basis.

Case 6

An LC provides for shipment of 500 pieces of trousers in 200 cartons. It also provides that partial shipment is not allowed. The beneficiary hands over 100 cartons to the shipping company on Jul 10 and another 100 cartons on Jul 16. Two bills of fading with dates Jul 10 and Jul 16, are issued. The cartons are to be carried in a single vessel to sail on Jul 20.
The documents are negotiated by the negotiating bank but these are returned back by the opening bank, stating that the LC did not permit partial shipment:

a) Opening bank cannot be forced to pay because the part shipment is not permitted
b) Opening bank should pay, as it is not partial shipment, since vessel is one
c) By negotiating defective documents, the negotiating bank has made mistake, hence it cannot force the opening bank to reimburse
d) Negotiating bank has made mistake. It should recover the payment from the beneficiary


Answer:
Solution: As per Article 31 of UCPDC 600, documents with 2 or more sets of transport documents covering shipment of goods on the same means of transport and same journey, are not considered partial shipment. Hence, the stand taken by the opening bank is not correct.

Case 7

Universal Bank (the issuing bank) received the documents under LC from Popular Bank (the negotiating bank) on Dec 22 (Tuesday). It took one day to check the documents and forwarded the documents for acceptance by the applicant. On Dec 29, the applicant pointed out that the insurance policy was in a currency different from the one as mentioned in LC. (Dec 25 was a holiday due to Xmas and Dec 27 was Sunday). The opening bank immediately informed the negotiating bank about this discrepancy by way of an Email and sought directions for disposal of the documents. The negotiating bank pointed out that the opening bank could convey the objection if any, within 5 days and not later, due to which it should make the payment:

a) Observation made by the negotiating bank is not correct. It has received the objection in time.
b) Observation made by the negotiating bank is correct. Opening bank has conveyed the objection 2 days late.
c) Observation made by the negotiating bank is not correct. It should convey this to the beneficiary and recover the amount
d) Loss would be to the account of applicant, as he took more than 5 days.


Answer: a
Solution: As per Article 16 of UCPDC, the issuing bank gets 5 banking days to determine whether the documents carry discrepancy or not. Dec 25 being Xmas holiday and Dec 27 being Sunday (which are to be excluded from counting), the issuing bank conveyed the discrepancy within 5 banking days. Hence negotiating bank cannot refute the claim of the opening bank.

EXPORTFINANCE

Case- 8

An exporter approaches the popular bank for pre-shipment loan with estimated sales of Rs.100 lakh. The bank sanctions a limit of Rs.50 lakh, with following margins:
Pre-shipment loan on FOB value — 25%;
Foreign Demand Bill - 10%;
Foreign usance bilis —20%.

The firm gets an order for USD 50,000 (CIF) to Australia. On 1.1.2011 when the USD/INR rate was Rs.43.50 per USD,
the firm approached the Bank for releasing pre-shipment loan (PCL), which is released.
On 31.3.2011, the firm submitted export documents, drawn on sight basis for USD 45,000 as full and final shipment. The bank purchased the documents at Rs.43.85, adjusted the PCL outstanding and credited the balance amount to the firm's account, after recovering interest for Normal Transit Period (NTP). The documents were realized on 30.4.2011 after deduction of foreign bank charges of USD 450. The bank adjusted the outstanding post shipment advance. against the bill. Bank charged interest for pre-shipment loan @ 7% up to 90 days and, @ 8% over 90 days up to 180 days. For Post shipment credit, the Bank charged interest @ 7% for demand bills and @7.5% for usance (D/A) documents up to 90 days and @ 8.50% thereafter and on all over dues, interest @ 10%.

1 What is the amount that the Bank can allow as PCL to the exporter against the given export order, considering the profit margin of 10% and insurance and freight cost of 12%?
a) Rs.2200000
b) Rs.1650000
c) R6.1485000
d) Rs.1291950


2 What is the amount of post shipment advance that can be allowed by the Bank under foreign bills purchased, for the bill submitted by the exporter?
a) Rs.19,80,000
b) Rs.17,75,925
c) Rs.19,73,250
d) Rs.21,92,500


3 What will be the period for which the Bank charges concessional interest on DP bills, from date of purchase of the bill?
a) 90 days
b) 25 days
c) 31 days
d) Up to date of realization


4 in the above case, when should the bill be crystallized (latest date), if the bill remains unrealized for over two months, from the date of purchase-(ignore holidays)?
a) On 30.4.2011
b) On 24.4.2011
c) On 24.5.2011
d) On 31.5.2011


5 What rate of interest will be applicable for charging interest on the export bill at the time of realization, for the days beyond Normal Due Date (NDD)?
a) 8%
b) 7%
c) 7.5%
d) 10%


Ans. 

1-d 
2-c 
3-b 
4-c 
5-d  


Explanations:

1. FOB value =
CIF Value i.e. 50000x43.5 = 2175000
Deduct Insurance & freight 12% of 2175000 = 261000
Balance = 1914000
Deduct profit margin 10% of 1914000 =191400
Balance = 1722600
Less Margin 25% = 430650
PCL = 1291950
2. 45000 x 43.85 = 1973250
3. Concessional• rate will be charged for normal transit period of 25 days and there after overdue interest will be charged.
4. Crystallisation will be done when the bill becomes overdue after 25 days of normal transit period. Date of overdue will be 25.4.2011. if bill remains overdue, it will be crystalised within 30 days i.e. up to 24.5.2011.
5. Rate of interest will be 10% as the overdue interest is stated as 10% in the question.