RNBC Bank 3

LOAN AND ADVANCES SYSTEM
THE SMALL MANS BIG BANK RNSB
Chapter 1 - INTRODUCTION
The word bank it derived from the word bancus or banque that is French. There was other of the opinion that the word bank is originally derived from the German word back meaning joint for which was Italianized into banco. But whatever be the origin of the word bank as Prof. Rramchandra Rao says. It would trace the history of banking in Europe from middle ages. Generally, banks do the business of money they take deposits of moneys from client and give loan to the person who has need of money. But in this age, for the convenience of customer, banks provides some other services to their customer such as bankers cheque, overdraft, internet banking, ATM facility, paying of bills, credit card, telegraphic transfer, insurance, demat etc. For a people, it is difficult to keep a very big amount of money in his house safely. So, people save their money to bank. Bank gives loan to the person who has need of money and gets higher interest on it than the interest of deposit. The margin between the interest of loan and interest of deposit is the income of bank.
S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR
Chapter 2 RESEARCH METHODOLOGY

Research Purpose :
Comparative Analysis of loans & Advances of Rajkot Nagarik Sahakari Bank with that of other major competitors and find out what we are lacking in our products, which area we need to improve and also find out the distinguished services provided by the different banks in the industry. We also done another research that is Service Satisfaction Review of Rajkot Nagarik Sahakari Banks Customer, The main objective of the study is to know the satisfaction level of the customer from banks Service.
For accomplishing the objective of the study researcher needs primary information from the respondent and for that exploratory research design is suitable.
Scope of the Study :

This Market Research involves the study of Comparative analysis of Banking products of RNSB with other banks. Brand preference of RNSB. Service Satisfaction Review of RNSBs Customer
Comparative study of different banking products done at Rajkot Nagarik Sahakari Bank has helped in understanding the products of different rival banks very well and also finds out their marketing strategies which will help us convenience the existing customer different banks well and also provide them where we are better than the bank with which they are transacting right now.
So study will help sale executive to convey the right services to the right customers. Which features are most prominent for consumers brand preference is also answered by this Market Research. Research helps to know the satisfaction level of the RNSBs customer from Banks Services. Research also involves the influence of promotional and advertising activities on the consumers buying behaviors. Market Research also tries to find out the identification of acceptance of new brand extension or line extension.
Source of Data :
There are two sources available for data collection. One is primary source and another one is the secondary source. a) Primary Data Questionnaire Observation b) Secondary Data From other Bank Previous Reports Websites Data source : Primary Data: We have conducted a survey for knowing the Service Satisfaction of the Rajkot Nagarik Sahakari Bank. We have taken the in depth interview of the persons and ask questioner to know the Satisfaction of the customers about the Rajkot Nagarik Sahakari bank, its product and service. Secondary Data: From Other Banks, Websites. For making comparative research of the Banking product, we have personally visited the branches of above listed
different banks. We have collected these data from the relationship Officer(RO) of the banks and from the internet to know how Rajkot Nagarik Sahakari bank is different from all other bank.
Sampling Design :
Sampling design is one of the most important aspects where the design must be appropriate in order to have the desired result. Sampling design includes various aspect and they are as follows: Sampling Area Sample Size : : Saurashatra 50
Limitation of the Project :

The market survey was limited to area of Saurashatra. Sample size is only 50, which may not represent overall population. the
Lacks of advanced scientific techniques for analysis and interpretation. In such cases respondents were not able to give all information in such cases as much as possible information was taken. We cant meet each and every user because of Human Limitations and other problems so we select some sample. Conclusion is derived by oneself (Decision Maker). Time constraint.
Chapter 3 INDUSTRY PROFILE

EARLY HISTORY OF BANKING
As early as 2000 B.C. the Babylonians had developed a banking system. There is evidence to show the temples of Babylon were used as banks. After a period of time, there was a spread of irreligion, which soon destroyed the public sense of security in depositing money and valuable in temples. The priests were longer acting as financial agents. The Romans did minute regulations, as to conduct private banking and to create confidence in it. Loan banks were also common in Rome. From these the poor citizens received loans without paying interest, against security of land for 3 or 4 years. During the early periods, although private individual mostly did the banking business, many countries established public banks either for the purpose of facilitating commerce or to serve the government. However, upon the revival of civilization, growing necessity forced the issued in the middle of the 12 t h century and banks were established at Venice and Genoa. The Bank of Venice established in 1157 is supposed to be the most ancient bank.
Originally, it was not a bank in the modern sense, during simply an office for the transfer of the public debt. In India, as early as the Vedic Period, banking, in most crude from existed. The books of Manu contain references regarding deposits, pledges, policy of loans, and rate of interest. True, the banking in those days largely mint money lending and they did not know the complicated mechanism of modern banking. This is true not only in the case of India but also of other countries. Although, the business of banking is as old as authentic history, banking institutions have since than changed in character and content very much. They are developed from a few simple operation involving the satisfaction of a few individual wants to the complicated mechanism of modern banking, involving the satisfaction of capital slowly seeking employment and thus providing the very life blood of commerce.
TYPE OF BANKS
Reserve Bank of India (RBI) Nationalized Bank State Bank Group Co-operative Bank Private Bank (old & new) Foreign Bank Regional Rural Banks
RESERVE BANK OF INDIA

The Hilton-young commission, appointed in 1926 has recommended the necessity of centrally empowered institution to have effective control over currency and financial transaction in the county. Accordingly, the Government had then passed Reserve Bank of India Act, 1934 and established the Reserve Bank of India with effect from 1 s t April 1935. The principal aim behind this was to organize proper control over the currency management in the interest of country benefits and to maintain financial stability. With this, the RBI mainly looks after the following important functions: To keep effective control over creation of credits and currency supply To control the Banking transactions of Central and State Governments. To act as Central administered Authority of all other Banks in the country. To organize control over Foreign Currency Transaction. To assist for improvement in financial aspect of the country .
NATIONALISED BANKS
The Banking Company Act establishes it in July 1969 by nationalization of 14 major banks of India. The sent percent ownership of the bank is of government of India.
STATE BANK OF INDIA & GROUP

The State Bank of India was established under the State Bank of India Act, 1955, the subsidiary banks under the State Bank of India (subsidiary Banks) Act 1959. The Reserve Bank of India owns the State Bank of India, to a large extent, and rest of the part is some private ownership in the share capital of State Bank of India. The State Bank of India owns the subsidiary Banks.
OLD PRIVATE BANK

These banks are registered under Company Act, 1956. Basic difference between co-operative banks and private banks is its aim. Co-operative banks work for its member and private banks work for earn profit.
NEW PRIVATE BANKS

These banks lead the market of Indian banking business in very short period. Because of its variety services and approach to handle customer and also because of long working hours and speed of services. This is also registered under the Company Act. 1956. Between old and new private sector bank, there is wide difference.
FOREIGN BANKS
Foreign Bank means multi-countries bank. In case of India Foreign Banks are such Banks. Which open its branch office in India and their head office is outside of India. For Ex. Citi bank,HSBC bank, Standard Chartered.
CO-OPERATIVE BANKS
1. state co-operative banks : state co-operative bank means the principle co-operative society in the state. The primary function of it is to finance other co-operative societies in the state. 2. Central/District co-operative banks : Central and district co-operative bank means the principle co-operative society in a district. The primary objective of this banks is to finance other co-operatives in the particular district.
REGIONAL RURAL BANKS

Regional rural banks are added in banking since October 1975. These banks have been established by the govt. of India in terms of provision of the regional rural bank act 1976. The central govt. while establishing a regional rural bank on the request of a commercial bank, shall specify the local limits within which is shall operate. The regional rural bank may establish its branches or agencies at any place within the notified area. State bank of saurashtra sponsors regional rural banks in saurashtra.
DIFFERENCES BETWEEN COMMERCIAL BANKS AND CO-OPERATIVE BANKS

(1) This operate through their network of branches spread over mainly in urban and semi urban areas and their management and policies are controlled by head office. This have distinct entities by themselves with separate jurisdiction and independent broad of directors. Banks are organized on a co-operative basis and are governed by their members according to the co-operative laws. (2) Banks are subject to the Banking Regulation Act and the control of the Reserve Bank of India. Banks are organized on a co-operative basis and are governed by their members according to co-operative laws and are under the control of state government and to a lesser extent of the Reserve Bank of India certain provision of Banking Regulation Act is also applied. (3) Banks are audited by external auditors. Audit and inspection of banks is done by the state cooperative department and Reserve Bank of India. (4) Banks are required to maintain minimum ratios between their balances with the Reserve Bank of India, other cash an disinvestment in approval securities and demand time deposits. Banks maintain cash reserve and liquid assets in relation to deposits only.
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(5) Deposits of banks may be collected in one area and lent in other areas and they can be shifted from one centre to another. Deposits can be used for financing agricultural and other activities only. (6) Banks can invest more freely than their co-operative counterparts. Bank has to follow the rules for investment laid down by the Registrar of Co-operative Society and Reserve Bank of India. (7) Banks enjoy more discretion in their lending policies which are determined by their board of directors subject of course to the regulation on Reserve Bank of India. Banks have to follow the loan policies laid down by the Reserve Bank of India and Co-operative department. (8) Rate of interest payable are controlled by Reserve Bank of India. Rate of interest payable are more in co-operative bank. (9) Any people can borrow from banks. Only members of the bank are allowed to borrow.
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Central Bank and Monetary Authority Reserve Bank of India
Apex Banking Institutions
IDBI
SIDBI
NABARD
EXIM BANK
IIBI
NATIONAL HOUSING BANK
Banking Institutions
Commercial Banks Regional Rural Banks Private Sector
Nationalized Banks Subsidiary Companies
Co-operative Banks State Cooperative Banks

Central & District Co-operative Banks
Public Sector
State Bank Group
Indian
Old New Banks Banks
Foreign
Local Area Banks
SBI
Subsidiary Banks IFCI
Industrial Development Banks All India State Level ICICI SFC SIDC
Subsidiary Companies
Development Banks
Industrial Development Banks

All India IFCI ICICI State Level SFC SIDC
State Level Land Development Banks Primary Land Development Bank
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Chapter 4 COMPANY PORFILE

HISTORY OF RAJKOT NAGRIK SAHAKARI BANK
Rajkot Nagarik Sahakari Bank is a leading Co-Operative Bank in Gujarat State, India. It has completed half a century of it existence. 93% of accounts are bellow Rs.200,000 which makes true its slogan THE SMALL MANS BIG BANK. Bank was established on 5th October 1953 With a small Capital Of Rs. 4890 and Membership of 59 persons under the leadership of Late Keshavlal Amrutlal Parekh as a Chairman, and Late Janmashankar Antani as a M.D. Bank has made tremendous & real progress under the leadership of former Chairman Late Shri Arvindbhai Maniar. Bank was the first co-operative institute to start functioning in the erstwhile state of Saurashtra. Bank was inaugurated by "SAHAKAR MAHARSHI" late Shri Vainkunthbhai Metha. The bank has been awarded A class of audit by the Government since its inception. The bank has crossed the priority sector lending rate and attaches due importance to National Planning and National priority fixed by RBI. The bank has been conferred Scheduled status by RBI from 1 s t Sep. 1988 as per the provisions RBI Act, 1934. The bank has also earned the status of Multistage Cooperative Society from Central Registrar of Co-operatives, New Delhi, on 17 t h Jan. 2001 and has also been issued licenses by RBI to open four branches at Mumbai. Out of which one branch has been opened on 30 t h March 2002 Being in the service sector with a vision of current & future trends, Bank started automation & modernization way back in 1987 and by 1995 all the Branches were computerized.
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REGISTERED & HEAD OFFICE Nagarik Bhavan No.1,Dhebarbhai Road, Rajkot 360 001. (Gujarat) Phone : (0281) 2233916-7-8 Fax : (0281) 2223933. Registration No. : 587 Registration Date : 21/09/1953.
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Social Contribution
RNSB has endeavored to discharge its social obligations by contributing for the social , academic, cultural, national, womens and Defense causes. It believes to return the earning wherefrom they are derived. With this noble ideal in the sight, the bank has denoted a handsome amount for an Engineering College and Architectural college being run by Vyavasayee Vidya Pratisthan Trust, Rajkot. 1. 2. 3. 4. 5.
6.
7.
8.
9.
Donation to Educational Institutions and Hospitals. Fodder Supply to Cattle Camps. Promotion of Sports Activities. Loans to Educationally Unemployed Youth. Help to Earthquake Victims by Providing Soft Loans. Rajkot Nagarik Sahakari Bank Prerit VVP Engg. Collage Was Sponsored by BANK . Indubhai Parekh School Of Architecture was sponsored by BANK. DOLL museum is managed by RNSB in the Rajkot. ( which is 3 r d in the ASIA and 2 n d in the INDIA ) Bank enter into a historic agreement with BSNL to provide free of cost mobile connections to our members, offering them facility of free CUG.
A grate number of social and educational institutions have provide the bank an opportunity to assist them in their need of hour and thereby derive satisfaction to justify its cooperative existence.
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FEATURES
1. Largest shareholders in the year 2006-07 are 218059. 2. Introduced smart card system for shareholders. 3. Transaction of shares only can shareholders association of RNSB be done through
4. Demat facility as well as stamp wending 5. Net NPA is zero 6. RNSBs reserve is sound backs NPA. 7. Out of 28 branches 26 has its own building. 8. For bills discount and other remittance, letter of credit, export business bank has tie up with HDFC, Indus bank & ICICI.
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Organizational Structure:
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BANK FRIST DO :
Banks main function is collect the money from peoples and lend that money to customers. When we talk about Indian banking system we see that RBI has made some rules and restriction for collecting and lending money. Banks are always want to made a large finance because its seen the working capacity of banks so banks are sometime made a wrong finance to wrong parties. So RBI now a day made strike rules for landing money to customers. So banks are not directly lending all money to customers first bank less the CRR (cash reserve ratio), which are 5% of total deposits. Then banks are need 25% to 30% money for SLR. So after this banks are able to lending 65 % to 70 %money form total deposits. After this process all banks are create a sound liquidity.
CLASSIFCATION OF ADVANCES :
Bank loan take various, depending upon the wishes and business customs of the borrower or the requirement of the bank. The loans usually found in a bank are either unsecured or secured.
Unsecured loans
A loan which are arranged no specific collateral and which are the obligation of borrowers who, in the opinion of the lending bank are excellent credit risks. Such advances are evidenced only by a negotiable instrument, promissory note or bill and are called unsecured or clean. An unsecured loan is granted by the Bank only after consideration has been given to the credit standing of the application and after the bank has been satisfied that the prospective borrower will be able to make repayment of the loan in a reasonable period of time which I usually determined at the time loan is sanctioned. In the case of unsecured at the banker relies on the personal goodwill of customer. The basis of such advances s the credit of the borrower and the banks gets nothing tangible to fall back upon in case of default by the borrower to repay the loan. The distinction between secured and unsecured advances recognized legally for balance sheet purposes has an undesirable effect on the publics mind as advances which are made against the personal security of the borrower have to be shown in the balance sheet as unsecured, which term conveys a feelings of
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unsoundness in he popular mind and as such these advances are discouraged by bankers, although in effect they may be in no way, inferior to what are known as secured advances. In considering application for unsecured advances the banker must satisfy himself that:
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1. The purpose for which the loan is required is likely to be remunerative and the product readily saleable. 2. Amount and period of loan applied for and time of application are appropriate to purpose. 3. The applicant understands his business and co-obligates if any, are credit worthy. 4. He has sufficient resources of his own for the expansion of the business and is not over trading. 5. He owns sufficient landed and immovable property in the locality where he carries on business. 6. Applicant has no speculative tendencies and is reported to be a good pay master. 7. Borrower will be able to return the money in short period and the loan will be used for genuine trade purposes. 8. Borrower has the legal capacity. 9. Purpose of the loan is within the terms of governments, current credit policy as expressed in RBIs directives issued to banks from time to time.
Secured Loans
A small percentage of the loans of banks consist of unsecured loans to borrowers who because of their strong financial condition of potential earning capacity have been able to convince the bank of repayment at maturity. There are many customers of a bank, who are not so well placed and whose financial responsibility or income is not strong to justify unsecured credit, amount of credit the borrowers would like to obtain is out of proportion to his net worth. It is usual for borrowers to strengthen their credit obligation by some approved tangible security to support loan. This the bank may sell in the event of the borrower failing to pay his loan at the appointed time.
Why loans are secured?

1. The financial condition of the applicant for loan is not strong enough to justify an advance without security.
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2. Some customers would borrow on a collateral basis rather than to justify an advance without security. 3. The borrowers may feel that he has an obligation to honor and he may be forced to repay the loan. 4. Sometimes security is furnished so that more favorable rate of interest may be obtained by the borrower.
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Appraising the securities

The work security means anything given to protect or safeguard the repayment of an advance and to justify the term. Then the thing so given should itself be safe otherwise the object for which it is given is not served. In general the intrinsic value as well as the current market value is determined. The security must possess the following characteristics if it is to serve truly the purpose of a bankers security. 1. 2. 3. 4. 5. 6. 7. Marketability Stability of plan. Durability Easy transferability. Easy determination of value. Margin Yield
Types of security
Direct i.e. deposited by the debtor to secure his own account. 2. Third party i.e. deposited by a third party to secure the customers debt. 1.
Approved Securities
1. 2. 3. 4. 5. 6. 7. 8. 9. Tender stocks and shares. Guarantees by responsible parties. Title deeds Bills of exchange Promissory note. Goods of document of title to goods Third of second mortgage. Undeveloped lands. Bills of sale, mortgage and books debts.
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TYPES OF LOAN AND HOW IT COMPUTES WITH OTHERS:

LOANS GIVEN TO CUSTOMERS
Personal surely loan Small Traders & Shopkeepers loan Vehicle loan Cash Credit Land and Building loan Industries loan Gold loan Loan on NSC,KPV,LIC policy and Fixed Deposits Mortgage loan (Social reason & Emergency Borrowing) Small business and industries loan Education loan
LOAN GIVEN TO STAFF MEMBERS

Vehicle loan Housing loan Festival loan Surety loan Housing equipment loan Overdraft system
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Personal surely loan

Maximum limit to Non Government employee Rs.5000. Maximum limit to Government employee Rs.10000. Two guarantors Sources of income and resident proof In case of Govt. employee installment should be directly deduct from salary. Repayment of loan in 40 equal installments. Rate of interest 15%.
Compares to others its; Pros.

1. Easy to people getting this loan in lower rate than other banks 2. No document charge and time saving process. 3. No guarantors required but borrower must be shareholder of bank.
Cons.
1. The amount of loan is very lower then other banks like Nationalize and other private banks. 2. Not cover large no. of customer in this loan like other banks because of limitation of this scheme.
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Small Traders and Shopkeepers loan

Small shopkeepers who do not maintain books of account and have stock in trade can get loan. Maximum limit up to Rs. 15000 or 50% of the stock which is less. Repayment of loan in 40 equal installments. Rate of interest 12% p.a. Loan will be given on type of C.C.(cash credit) also.
Compare to others its Pros.

1. Most useful for small income person who has small business and their most prefer this bank. 2. Compare to other nationalize banks and private banks which are not interested in this type of finance. RNSB are most use this chance. 3. No more document requires and no processing charges so it cheaper to borrowers.
Corn.
1. The recovery of this loan is some very tuff because some time borrowers are not interested to repayment of loan. 2. The amount of this loan is lower and now days most of customers are needed more amount loan so there are going for other private and nationalize banks. 3. Rate of interest is sometime problems for very small business persons who are want to borrow the money.
Vehicle loan
Now a days large number of people are want to buy a vehicle because now vehicles are cheaper the past because of competition in automobile sector and banks are tried for this loan most. RNSB has also provided this loan for customer. Banks has different schemes for this loan. These are New
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vehicle loan, Old vehicle loan, Tie up with PAL automobile manf. In Rajkot.
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New vehicle loan (except car loan)

Quotation of vehicle. Two guarantors. Sources of income. Additional securities. ( e.g. land.building,F.D.) NSC,LIC policy . Maximum limit 75%. Repayment of loan in 40 equal installments up to amount of Rs.25000 Repayment of loan in 40 equal installments if amount of loan is more than Rs.25000 Rate of interest 13%.
Old vehicle loan

Maximum limit varies between 25% to 60% according to valuation. 25% of margin money has to deposit in bank. Vehicle loan deposit Rs.1000 to Rs.10000. Old vehicle loan limit Rs.4000 to Rs.40000 Rate of interest 13%.
Tie up with PAL Auto. Manf.

RNSB provides loan to PAL Auto. Manf. Which is manufactured Diesel rickshaw in Rajkot? And bank gives advances on vehicle with lower rate of interest. Rate of interest is 11%. Repayment of loan in maximum 36 equal installments.
Compare to other its Pros.

1. Quick finance for any type of vehicles so any customers are getting finance for any vehicles. 2. Large numbers of borrowers under this loan than any other co-operative banks.
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Cons.
1. Limited customers will be eligible for loan because rule of bank that only shareholders will get a loan. 2. Competition in vehicle finance now a days in great and RNSBs work in this sight is not more aggressively most of customers are go for other banks.
Cash Credit (C.C.)

Cash Credit is the main method of lending in India and accounts for about 70% of total bank credit. Under this system, the banker specifies a limit, called the cash credit. Limit for the each customer, up to which the customer is permitted to borrow against the security of tangible assets or guarantees. The customers withdraws from his cash credit account as and when he needs the funds and deposits any amount of money, which he funds surplus with him on any day. The cash credit account is thus an active and running account to which deposits and withdrawals may be affected frequently. The customer is required to provide tangible assets as security to cover the amount borrowed from the banker. The borrower is charged interest on the actual amount utilized by borrower and for the period actually utilized only. There is no any limit for allowing Cash Credit. Against business turnover and stock margin this facility is available. There is no any limit. Books of account for last three years. Stock list at the date of application. Income tax return and assessment order of last three years. Audited report from C.A. Municipal shop act license. Receipt of rent. Partnership deed. Register of firms. S.S.I. incense in case of small scale industry. In case of company memorandum of association and article of association. Project report and C.M.A. report. The rates of interest are 13 % to 15 % and also give rebate if rating of customers is AAA and AA.
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Compare to others its, Pros.

1. In the region of Rajkot these facility will be used by customer highest form RNSB because at that time no one co-operative bank has large amount for these facility, so RNSB is wonderfully compute with nationalize banks at that time. 2. Customer relationship is most important in this facility and RNSB has large numbers of customers who are continue gating this facility. 3. The processor of finance of C.C. is time saving on behalf of nationalize banks. So customer getting C.C. in less time.
Cons.
1. Many times limitation of rules of co-operative finance are make difficulty for banks to give finance and by this reason Banks lost few customers. 2. Now days new customers making is difficult because of new comer private banks and nationalize banks. So bank has continued with older customers. 3. The restriction on the co-operative banks is stick after the some co-operative banks demotions so its not possible to RNSB take big risk on any limited customers.
Land and building loan

Land and building loan is given for different purposes. Now a day the business of land and building are in growth so bank will concentrate on this type of loan.
(A)
Purchases
Only for purchases of building or home maximum limit is 80% of register document. Maximum amount of purchasing house or building is Rs.10,00,000/29
Regular customers are gating rebate of 1% in interest rate. Rate of interest is 14% Repayment of loan in 144 equals installments.
(B)

Construction
Maximum limit is 80% of estimated cost of construction. Plan from corporation. Permission deed started from original owner. Loan will be given in different time period of construction of building. Rate of interest is 14% Repayment of loan in 144 equals installments.
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(C)

Repairs
Purpose of repairing a house or building loan amount is maximum 80% of document of building. Maximum amount in Rs.2,00,000/Rate of interest is 13.5% Repayment of loan in 144 equals installments.

1. Most of middle class peoples are go for co-operative finance for purchasing a building and houses because of cheaper finance of co-operative banking. 2. In the past RNSB is one and only bank who give these type of finance on cheaper rate of interest to any class customers. 3. RNSBs main function in loan schemes are housing finance for middle and lower incomes customers so its today also first choice of the lower and middle class.
Cons.
1. Rate of interest is not compute with other banks, like housing finance agencies of govt. and other banks. 2. Limitation of area of covering because villager are not gating loan from the banks. 3. Now a days competition in housing finance are cut throw so large numbers of finance companies and private and nationalize banks are in competition. So RNSBs customers are going for other easy finance companies.
Loan for purchasing housing equipment & components

Purpose of this loan is providing the loan housing equipment for better life to customers. for
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Govt.servants / non-govt.servents / or a person who regularly paid I.T.return. Loan will be 80% amount of the prize of equipment or goods. And maximum amount is Rs.50,000/ Rate of interest is 13% and time period of repayment in installments is maximum 66 months.

1. Customers are gating loan for any types housing equipment easily. 2. Most of urban co-operative banks and nationalize banks are not given this types of loan so RNSB will do healthy competition with other banks. 3. Processes of gating loan are very easy and repayment facilities are also very easy for borrowers.
Cons.
1. The amount of loan is lower then other private banks so many customers are go for other finance sources. 2. Rate of interest is also high then other so its create problem for healthy competition. 3. Banks doesnt have any contract for any company for only financers.
Industries loan
In this segment the small and middle levels industries are eligible for industries finance. All machinery loans are considered as industrial loan. For purchasing an office equipments and furniture are also considered under this loan. For stock and components finances will given 60 % to 75 %. And interest rate is 13 % to 15 %. As per amount of loan.
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Rebate will be given to the AAA & AA rating customers who are regular pay the installment of loan.
For gating this loan bank need,

1. 2. 3. 4. 5. Two guarantors. 1 year book of account. Shop act license. S.S.I.NO. Additional securities i.e. land / building / F.D.etc

1. RNSB is very old bank in this region so it has many old customers who has good borrower of the banks. And they are continuing with the bank. 2. In saurashtra region many few co-operative banks has a large number of customers in this loan segment. 3. Bank also provides loan facility on import machineries. So customers have no problem for other agents for import the machineries.
Cons.
1. Bank has a strictly rules and regulation of RBI so bank has limitation for lending money for customer. 2. Banks area of work is not large so banks cants capable to give large amount of money like nationalize and capable private banks. 3. Rate if interest is make difficulty in way of easy finance to customers.
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Gold loan
Only co-operative bank who give this type of loan. For personal requirement this loan will lend by bank In the securities gold jewelry put. Bank will count the rate of gold in regular time base and borrower will get 70 % of golds amount in to the loan. Maximum amount of loan in city is Rs.50,000/- and out of city will be Rs.20,000/- will lend by bank. Rate of interest is 11% and the period of repayment is 26 months. Minimum 21 carat pure gold will require.

1. Only co-operative bank provide this facility. in this region which are
2. A persons who need money in emergency they has easy option of this loan. 3. Bank has also benefits of gating a large numbers of customers in this segment.
Cons.
1. The amount of loan is less so many customers are going for other types of loan
Loan against NSV,KVP,LIC policy and F.D.

For emergency requirement of customers. Borrowers names NSC,KPV,LIC polices are require in securities of this loan. Loan will be providing by overdraft. and no limit for finance. Rate of interest is NSC/KVP+2% and LIC policy-10 %.
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1. Banks customers have a good option for internal finance from banks because they are already FD in bank. 2. No limitations for finance so bank is sufficient to borrow money as much borrower is needed. 3. Banks has no more risk in this lending money because of guarantied documents.
Cons.
1. Rate of interest is high then other banks. customers are less interested in this loan. So
Mortgage loan (social reason / emergency borrowing)

For borrowers social responsibility / emergency requirement and in emergency purpose any reason will allowed. Borrowers income with family must be more than Rs.2,00,000/- and for govt.severnt gross monthly income will be Rs.15,000/- or more. In the securities borrowers fixed assets evitable mortgage and one guarantor require. Loan will be given fixed assets valuations 70 % maximum. Or maximum in amount Rs.5,00,000/Rate of interest will be 13 % and repayment time period is maximum 60 months.

1. Easy to borrowing from bank because of no more processing time and charge.
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2. Bank taken guaranties so bank has not worried for that loans repayments.
Cons.
1. Now days most of banks are providing these facility so competition is make difficulty to gating customers. 2. Banks area of work is limited so it cant compute in good ways.
Small businesses & industries loan

Purpose of this loan is requirement of current assets like stock and money for small industries and retails traders. Business will start minimum from three years. Loan will provide by overdraft. Require documents for these loan are fixed assets like building or machinerys mortgage and one guarantor. Loan amount was maximum in Rs.10,00,000/- or annual sellings 25 % or current assets 80 % or fixed assets 70 % whichever is less. Rate of interest is 13 %. Only on rule is give stock-sheet one time in the year.

1. Rate of interest is less competitive for other banks and financial institutions. 2. RNSB more effective in this segment because its main customers come forms small businessmen and small industrialist. 3. Loan is provided from of overdraft so bans have also benefit of not lend lots of money in one time .
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Cons.
1. Government agencies are most concentrate on growth of SSI so they are provide loan lowest interest rate so banks customers are cuts. 2. In the region of saurashtra where SSI is in large number banks cant able to provide lots of loan for them because of limitation of RBI.
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Educational loan
Student of any Govt. approve Universities, Medical, Engineering, Management or any professional courses as well as any post graduation courses can be got. If students wants to study within India and outside the India are Rs.7.5lakhs and Rs.15lakhs respectively. Loan is included all the amount related with the study like course fee, hostel fee, cost of books etc. Rate of interest is 9.5% Interest should be paid regularly from the date of passing loan. The completion of course, after 3 months, student must be paid the loan in 60 equal installments. Loanee as well as guarantors should be the member of RNSB.

1. Rate of interest is very law nationalize and private banks. 2. Procedure for granting is easy. 3. There is rebate facility if we are installments with study. ( 2% rebate ) paying loan compare to other
Cons.
1. Only member of RNSB takes educational loan from the bank.
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Loan for RNSBs staff

Vehicle loan
With out interest For two wheelers maximum Rs.50000/For four wheelers there are no limits in loan amount. Repaid within 5 years or service time of employee in organization which ever is less. Employees can get this loan 3 times during their service period.
Housing loan
Rate of interest 6.5% for the first time and second time rate of interest is 7.5%. Repayment of loan is 20 years or service time of employee in organization which ever is less. No limit for loan amount to employee.
Festival loan
Rate of interest is nil. Time duration for granting this loan is only one year. Maximum amount is Rs.5000 for taking this loan. Repayment in 10 equal installments. This is given most probably in month of October and November.
Surety loan
Surely loan to employees maximum up to Rs.15000. Guarantors are staff members only. Other terms and conditions remain same as per personal surely loan.
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Housing equipment loan

Housing equipment loan to employees are maximum up to Rs.20000. Rate of interest is 6%. Time duration of repayment of loan is 60 installments. Guarantors are only staff members.
Overdraft system to employee

Rate of interest is 11%.( PLR 1% ) Time duration of loan amount is 5 years. Amount of loan, for the level of employee Sub staff Rs.100000 Clerical staff Rs.110000 Officers Rs.120000 Limit of overdraft reduced by every month.
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Rate of interest on Advances from 1 s t April 2007

No . A 1 2 3 B 1 2 3 4 5 6 7 8 9 10 11 12 13 Types of loan Int. rate Time duration In months Installm ent Per Rs.1000
Security group vise (machinery loan, c.c., mass stock) Platinum group 150%security of loan amt. Gold group 100%security of loan amt. Silver group Less than 100%security of loan amt. Name of loans & advances Personal surety loan public Personal surety loan staff Small traders and shopkeepers loans Vehicle loan Cash credit Land and building loan Up to Rs.200000 More than Rs.200000 Loan for parching house equipment Gold loan Loan on NSV, KVP, LIC Mortgage loan any purpose Social purpose Loan on F.D. Loan on Demat share Nagarik car loan yojana
11.5% 12.5% 14%
40 66 120 40 66 120 40 66 120 40 66 C.C. 40 C.C. 144 144 66 26 O.D.
30.45 20.77 14.34 30.93 21.28 14.34 31.67 22.07 15.82 31.92 22.34 C.C. 32.00 C.C. 14.05 14.37 21.54 43.63 O.D.
15% 15% 12% 13% 13% to 15% 13% 14% 13% 11% NSV/KVP+ 2% LIC 10% 13% 13% F.D. + 1% 11% 11%
36 60 F.D. time 24 48
35 23 46.84 26.08
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LOAN PROCEDURE
1.
Application Shakh Report Loan Report Inspection Committee Approval Letter of Condition Documentation
2.
3.
4.
5.
6.
7.
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1.
APPLICATION
A customer required any advances from a bank have to apply for the same.
It is a compulsory for Rajkot Nagarik Sahakari Bank that the applicant must be the member or share holder. In the application form bank need primary information about borrower and guarantor. Income proof also required.
2.
SHAKH REPORT
It is a confidential report prepared by bank for the members who want to take a loan. In the shakh report loanees financial position and also guarantors financial position are mentioned. In the case of industries loan turn over report will required.
3.
LOAN REPORT
After the shakh report approves, application go for the loan report. Bank analyses the application throughout. And report will go to next stage. customers
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4.
INSPECTION
For knowing correct picture banks officers are make an inspection of property of customers. But it is done in case of totally new and doubtful customers application. For regular customer, it is not required.
5.
COMMITTEE APPROVAL
After completing everything and if application found correct than loan report should to come along with committee. The system of Rajkot Nagarik Sahakari Bank is divided into different committee for sectioning different amount of advances. If committee members feel that the file of applicant for advances is correct and there is not any problem in granting loan than they sanction the loan. If an amount of a loan is less than the actual application amount and if a customer wants the amount which is mentioned in application form at that time customer have to prepare one more application to the committee to sanction the full amount. After the second application committee think over the new application and if they feel satisfied than they sanctioned full amount of application.
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6.
LETTER OF CONDITION
In the letter of condition bank includes the rate of interest, installments, deposits and other primary rules. Steps taken by the bank if customer is not able to repay the loan are also mentioned.
7.
DOCUMENTATION
Document means any matter expressed or described upon any substance by means of letters, figures, or marks or by more than one of those means intended to be used or which may be used for the purpose of recording that matter. At Rajkot Nagarik Sahakari Bank different documents are required for different Loans / Advances like promissory note, letter of guarantee, equitable mortgage and Hypothecation of vehicle etc.
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Margin money
1. When bank grant loan, the applicant have to keep same amount in his account as deposit which is called margin money or simply deposit to loans. 2. This deposit is useful when applicant fails to repay the loan. At than time bank are forfeited this deposits. 3. After the repayment of loan the amount of deposits should be given back to applicant. 4. Margin money should be either in form of share deposits of in term of loan deposits. 5. The margin money for a. Personal surety loan -5% of advances b. Other loans -2.5% of advances
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RECOVERY PROCEDURE
A banker has not merely to advance money to trade, industry and commerce but has to ensure that money which is advanced comes back to him / her. If money advances is not recovered, the banker is likely to suffer a loss and will not be able to balance liquidity with profitability. It is, therefore, necessary for a banker to keep a close watch over advances granted by him to different types of borrowers. There are numbers of occasions when a banker will think it necessary to ask a borrower to repay the advances, which are like below; 1. Death of borrower or guarantor. 2. Insolvency of borrower or guarantor. 3. Dissolution of partnership. 4. If there is a adverse report in the market about the financial soundness of borrower. 5. If change in policy is announced by time to time from the Reserve Bank of India. 6. There may be some other occasion also, when an advance my have to be recover. These may be under the RBI directive or under the Government Legislation. 7. If the borrower fails to repay, the banker should give a notice preferably through a lower by register post calling upon the borrower to repay the advances, failing which he may be proceeded against according to the law. 8. If necessary the borrowers may be advised or persuaded to repay the advance in installments to be fixed up in consulting with borrower. 9. The legal course will be available to the banker against the borrower depends upon the type of borrower and the type of security offered as a cover for the advances.
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10.The banker will therefore have to take appropriate legal action keeping in mind the type of borrower and the type of security. The most important point to be noted is that as a banker, while following the recovery procedure the interest of the bank should always be uppermost in his mind.
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RNSBs Recovery management

For banking industry Recovery has become most precious matter. Recovery against advances has become difficult task for banking industry in recession. Recovery is considered core activity of banking industry. To make all transaction and services smooth , recovery is most desirable activity to be carried out forcefully. Recovery Management is consisting of the functions of acquiring back what the bank has advanced with the principle amount as well as interest on same. Rajkot Nagarik Sahakari Bank is Zero NPA bank in saurashtra region. Its a recordable movement in any co-operative banks.
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Process of Recovery:
If three installment are out standing # Notice through branch office # Personal visit and meeting In no response # Notice through Advocate Still no effect # Claim through court # If party is ready, out of court settlement is done. Otherwise # After completion of formalities, bank will get the order of recover the dues. forfeiture of the security from the court to
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Identification of Non-Performing Advances

How account become non-performing asset ? 1. Term loan
If interest or installment of principal remains past due for a period of any one quarter, it becomes NPA. Past due means it is an amount due under any of the facility but not paid within 30 days after it become due.
2. Cash credit and overdrafts

If the account remains out of order for a period of any one quarter, it becomes NPA. Out of order means the out standing balance continuously in excess of the sanctioned limit or drawing power. In this case, there is no credit continuously for three months or credit is not enough to cover the interest debited during the same period.
3. Bill purchasing and discounting

If the bill remains over due and unpaid for the period of one quarter during the year, it becomes NPA.
4. Other credit facility

If any amount to be received remains past due for a period of one quarter during the year, it becomes NPA.
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Non-Performing Assets
NPAs are loans given by bank or financial institute where the borrower defaults or delays payments of interest or repayment of principle. Assets here also include leased assets. An NPA was defined a credit facility in respect of which interest and installment of principle has remained past due for a specific period of time. The specified period in a phase manner is as under:
Year ending 1993 1994 1995 onwards From 2004
If interest/installment has remained unpaid, account becomes NPA 4 quarters(365 days) 3 quarters(270 days) 2 quarters(180 days) 1 quarters(90 days)
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MISSION 0% (ZERO) NPA

This is an extraordinary scheme for the development of RNSB. Last year when this concept was come into the limelight in meting of directors then this scheme was established in suddenly in bank. In this mission RNSBs all the staff members took upon themselves of their own volition the task of recovery and a zero NPA project was launched under the guidance of Senior Officers of Head Office & the directors of the Bank.
During this year RBI had tightened the NPA norms for default from 180 days to 90 days. Despite this tightened norms, the efforts put in by the staff members on their own helped the bank effect substantial recoveries of NPAs during the year and also prevent slippage toward NPAs.
1. This is a first time and type mission in any co-operative banks history where all banks employee are work in same mission in same way. 2. No one bank could work on this function by this way. So its an achievement of bank to improve it staff support for this type of mission. 3. For this work employee are getting motivation by bank through the trophy and the other prizes.
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Progress at Glance
Bank is lend its 83% finance to middle class and lower class customers. Total advances give by bank was in year 2006 Rs.430.91crores and in 2007 it is Rs.504.94crores.
CHART SHOWING ADVANCES
GROWTH IN ADVANCES RS. IN CRORES

550 500 Adavances 450 400 350 Adavances 2003-04 2004-05 2005-06 2006-07 421.55 428.99 430.91 504.94
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CHART SHOWING SECURITY WISE ADVANCES
SECURITY WISE ADVANCES RS. IN CRORES. Hypothecation of

12.22 10.66 158.09 2.39 32.3 1.72 58.37 229.19
stock Hypothecation of Plant & Machinary Personal Surity Shares Equitable Mortgage of Land & Building Pledge of gold pledge of FD Other Security
The chart above shows security wise advances in Rs. In crores. The maximum share of total advances Hypothecation of stock of Rs. 229.19 crores is of
The share of equitable mortgage of land and building of Rs. 158.09 with the second number among all other securities. The least share is of personal surety of Rs. 1.72 crore
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Chapter 5 - Theoretical Aspects of the Study

SWOT ANALYSIS
STRENGTH
RNSB was started at the initiatives with a small capital of Rs.4890 and membership of 59 persons but at present bank has developed in manifolds with the time. Membership (share holder) of bank is mounting towards 2, 50,000/which is record by it self & provides an example of how a mass movement can be turned in to the instrument for social enlistment of Government of India. RNSB does other activities such Demat safe Depository Walt, custodial service, pledge etc. that increase the strength of RNSB. Promoters of RNSB are reputed persons and they all are financially sound. No. one of them is involved in speculative activity. Well spread branch network across the Gujarat and one branch is at Mumbai also. More than 50 years experience of banking activities. Qualified manpower.. Banking services being rendering the service. the core business expertise in
It is leading not only in Rajkot but also in all Saurashtras co-operative bank.
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58
WEAKNESS
Very little knowledge about computerized banking among old staff. Lack of personalized service and direct marketing staff. It is very small unit of industry it is very difficult to Compete with giant private Sector banks, nationalized banks, and multinational banks. Lack of competent staff on several important department such as legal, loan, recovery etc. Recruitment is not on the professional basis and also it is same far promotion policy hence there are very less no. of. Efficient staff at senior levels. Technologically it is far behind from other banks.
OPPORTUNITY
Developing of banking industry will give it more business opportunities. Co-operative banks can reach easily to rural are, which is difficult for private Banks. Providing better quality service, it can attract big client. Converting co-operative bank into private Bank. It can increase its strength. More states can also be covered. Adoption of modern techno. Logy to remain competitive.
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THREATS
Increasing competition in this business no. of competitors came in recent time. Co-operative sector is neglected by government Constantly. Cutthroat competition by local player in terms of service charges. Lack of technological vision, lack of vision of seeing future. Pvt. Bank can be big competitors and even if we compare it with schedules bank than also its competitors are in very sound condition.
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BCG M ATRIX
BCG Growth- Share Matrix

H I G H
M A R K E T G R O W T H R A T E
STAR
QUESTION MARK
Loans and advances in cooperative sector Fixed Deposite CASH COW
Demat facility stamp wending
DOG
L o w
SAVINGS A/C CURRENT A/C.
INSURANC E
HIGH
RELATIVE MARKET SHARE
LOW
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Chapter 6 DATA ANALYSIS & INTERPRETATION

We Collect Data of 50 Customers of Rajkot Nagarik sahakari Bank for knowing satisfaction level of Customers from its service. Q-1 Occupation of the Customer? Criteria Business Professional Service Retired Student Other Total No. 20 6 2 10 10 2 50
OCCUPATION
4% 20% 0% 40% BUSSINESS PROFESSION RETIER SERVICE 20% 4% 12% STUDENT OTHER
Analysis:
From the above content we can see that the research that contain the data of businessman, professional people, service
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class person and retired persona and we also include student for knowing actual data.
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Q-2 Since How long you deal with the Rajkot Nagarik
sahakari Bank? Criteria No. of customer Less than 1 Yr. 15 1 to 5 Yr. 15 5 & Above 20
LOYALTY
30% 40% LESS THAN 1 YEAR 1 TO 5 YEARS MORE THAN 5 YEARS
30%
Analysis:
From the given data we can analyze that near about 40 % of customer who deals in bank since more than 5 year and 30% of customer who are deals with 1 to 5 Year and 30% of customer who deals with less than 1 year and they are very much satisfied with the services of banks and also convince to invest in only Rajkiot Nagarik Sahakari bank.
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Q -3
Bank.
How often you visit in Rajkot Nagarik sahakari
Criteria Daily Two Days in Week Weekly Not Fix Total
No. 13 7 5 25 50
CONTACT WITH BANK
26% DAILY 50% 14% 10% 2 DAYS IN A WEEK WEEKLY NO FIX
Analysis:
From above given research we can find that 26% of customer visits bank daily and 14% of customer that visits the bank 2 days in week and 10% of customer visit the bank week and 50% of customer are not fix to visit bank they come to bank to make transaction according to their need.
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Q-4 With Which Product you dealing in Rajkot Nagarik

sahakari Bank?
Option Saving A/c. Current A/c. Recurring A /c. Sp.saving A/c. C.C.A/c. Other Total
No. 30 72 0 9 28 11 150
TYPES OF ACCOUNT
8% 8% SAVING A/C 10% 0% 44% CURRENT A/C RECURRING A/C SP. SAVING A/C CASH CREDIT OTHER 30%
Analysis:
The data which we collected is contain the 30% of current account customer while 44% of saving a/c and other customer holding different product of bank like 8% customer holding cash credit account, 10% customer holding special saving account and approximately 8% customer holding other types of account .
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Q. 5 Have you take any loan from Rajkot Nagarik Sahakari

Bank?
Yes No Total
33 17 50
LOANS
34% YES NO 66%
Analysis:
The Data which we collect I contain the 66% having loan from bank and 34% costumer has not taking loan from RNSB.
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Q.6 How much time taken by bank to pass loan?

2 Days 4 Days 1 week More than 1 week Total 3 9 11 10 33
TIME DURATION
9% 30% 2 DAYS 27% 4 DAYS 1 WEEK MORE THAN WEEK
34%
Analysis:
From above given research we can find that 34% loan passing in 1 week, 30% loans are passing trough more than 1 week, 27% loans are passing in 4 days and 9% loans are passing in 2 days.
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Q-7
What is the level of Satisfaction from Rajkot Bank? No. 11 25 13 1 0 50
Nagarik Sahakari
Option Highly Satisfied Satisfied Indifferent Dissatisfied Highly Dissatisfied Total

CONSUMER SATISFACTION
2% 26% 0% 22%
HIGHLY SATISFIED SATISFIED INDIFFERENT DISSATISFIED HIGHLY DISSATISFIED
50%
Analysis:
From this research question, we can analyze satisfaction level of the customer is near about 50% of the customers are satisfied with the service of the bank and near about 20% of customer are highly satisfied with the services given by RNSB.
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Chapter 7 FINDINGS
FINDINGS
This chapter contains some of the findings from my study of selected Rakot Nagarik Sahakari Bank (Urban Co-operative Banks). 1. The strong points of RNSB is its financial strength, amount of depositors and good services. 2. In some of the area like loan, firm is very rigid so, flexibility is needed. 3. One of the important point is that new client comes through the recommendations of the existing customers. 4. The main thing is that RNSB is lacking the marketing strategy in the banking area. 5. The new client must be member of RNSB (Share Holder). 6. In the area of Loans and Advances, RNSB having a least rate of interest among the nationalize as well as cooperative sector. 7. The tendency to donate generously to institutions by the Board of Directors of Rajkot Nagarik Sahakari Bank is commendable. Some of institutions to whom huge contributions are given are V.V.P. Engineering College, Satya Sai Heart Hospital, Ashok Gondhia Memorial Hospital (Now Wockhart) etc.
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8. Practice of easy availability of office bearers of the Rajkot Nagarik Sahakari Bank Ltd. For the members, a customer or loanees is well adopted. This also serves as the intelligent agency to keep a watch on the ways and means how the Bank advances are utilized.
Chapter 8 - SUGGESTIONS
There are certain glaring suggestions by following that there can be better development of Rajkot Nagarik Sahakari banks. 1. Many people wants the on-line demat facility from the bank. 2. Bank should also provide ATM, Phone Banking and NetBanking. 3. It is also required to increase working hours not like private bank but more than the other co-operative banks because it creates very good image in the mind of the people. 4. Banks area of working is limited so, people wants more branches at urban area like Ahmedabad and other area of Gujarat. 5. RNSB must have to adopt new and advance technology, by this adoption bank can provide better quality service and process and saving of time. 6. Banks some loan schemes are very good, but the amount of that loans are lower than the other banks. So, customers are attract towards other banks. 7. Bank has to take customer satisfaction periodically like some private banks. review
8. To improve efficiency of employees of Co-operative Banks, a full fledged training centre for the benefits of the employees should be established and regularly run by the leading Co-operative Bank viz. Rajkot Nagarik Sahakari Bank Ltd.
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QUESTIONNAIRE FOR RNSB USING CUSTOMER

This research is only for purpose of studying the satisfaction level of customers. The information provided by you is not used for any other purpose. As I am student of MBA, I surveying about the satisfaction level of customers of RNSB. I expected your kind cooperation for filling this questionnaire. ( 1 ) General Information of Customers :A.) Name :______________________________________________ B.) Address :______________________________________________ ______________________________________________ C.) D.) Contact No. ___________ Occupation :Business Service E.) Profession Students Retire Other _______________________
Yearly Income :-____ _______________________
( 2 ) Since how long you deal with RNSB ? (A.) Less than 1 year (B.) 1 to 5 years (C.) More than 5 year ( 3 ) how often have you been in contact with RNSB ? Daily Weekly Two days in a week No fix
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( 4 ) Which type of account do you have in RNSB ? Saving a/c Current a/c Recurring a/c Sp. Saving a/c Cash Credit Other
( 5 ) Your Selection of Bank is Based on ( Give Rank 1 to 5 ) (A.) Safety (B.) Service (C.) Reputation (D.) Rates (E.) Proximity
( 6 ) Have you take any loan from RNSB? YES NO ( 7 ) IF YES than describe it. ( 8 ) How much time taken by bank to pass loan? 2 days 1 week 4 days
more than 1week. ( 9 ) Do you deal with other Bank ? Yes No
( 10 ) If yes, where ? _______________________________________________________ ( 11 ) Do you find any difference in service of RNSB with comparison of other Banks ? Yes No
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( 12 ) If yes, state the Difference : ______________________________________________________ ( 13 ) What is the level of satisfaction about service provided by RNSB ? (A.) Highly Satisfied (B.) Satisfied (C.) Indifferent (D.) Dissatisfied (E.) Highly Dissatisfied
( 14 ) Have you faced any difficulty with RNSB ? Yes ( 15 ) Was it Solved ? Yes ( 16 ) In what time ? 1 day Week 2 days more than week No No
( 17 ) Would you Recommend RNSB to others ? Yes No
( 18 ) Suggestions : ______________________________________________________ ______________________________________________________ ______________________________________________________ ______________________________________________________
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BIBLIOGRAPHY
Websites
www.rnsbindia.com www.rbi.com www.google.com ( search engine )
Reference Books & Journal

Financial edition Banking & Finance Management by Prasanna Chandra 5th
Banks Document
Annual Report 2006-07 Information Collected from other bank.
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TABLE OF CONTENT
CHAPT ER NO. Preface Acknowledgement Executive summary 1 2 Introduction Research Methodology 2.1 Research purpose 2.2 Scop of study 2.3 Sources of data 2.4 Sampling design 2.5 Limitation of study Industry profile 3.1 Early history of banking 3.2 Types of Bank 3.3 Differences of commercial bank and cooperative bank Company profile 4.1 History of RNSB 4.2 Social contribution 4.3 Features 4.4 Organizational structure 4.5 Types of loans and advances 4.6 Loan procedure 4.7 Margin money 4.8 Recovery procedure 4.9 Non Performing Assests 4.10 Progress at Glance Theoretical Aspects of the Study Data analysis and interpretation Research Findings CHAPTER NAME Declaration Page no. I II III IV 1 2
11
5 6 7
48 52 59
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8 9 10
Suggestions
60 61 64
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A GRAND PROJECT REPORT ON
FUNDAMENTAL ANALYSIS OF FOREIGN EXCHANGE RATES
As a Part of Partial Fulfillment of the MBA Degree 2006-08
Guided By Prof. Abhishek Ranga Prof. Sonu Gupta Prepared By Mayur Vaniya (114) Deepak Danger (15) Submitted To
S. K. Patel Institute of Management & Computer Studies GANDHINAGAR
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ACKNOWLEDEMENT
We, the students of S.K.Patel Institute of Management & Computer Studies are extremely thankful to our institute for giving us an opportunity to undertake this Grand Project. We are very much thankful to and their supervision and patiently
responding to our various queries and for his valuable guidance. We are also thankful to our Director Prof. S.Chinnam Reddy & Prof. Sonu Gupta and Prof. Abhishek Ranga (project guide) and Prof. Prakas Chawala (coordinator) for providing us the helpful support for completing the report in a for given schedule. Thanks for their benevolent support and kind attention. Their valuable guidance at each and every stage of the project always gave a Phillip to our enthusiasm. Last but not the least we express our gratitude to all people who are directly or indirectly involved in the preparation of this report.
Deepak Danger Mayur vaniya
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EXECUTIVE SUMMARY
The
rapid
industrialization, facilities, the
advancement availability
in of
technology rapid means
and of
communication
transportation has all contributed towards the globalization of business across the frontiers of countries. There have been new innovations in the products developments. The government of India has also opened Indian economy. Various fiscal, trade and industrial policy decisions have been taken and new avenues provided to foreign investors like FIIs and NRIs etc. for investment especially infra-structural sectors like power, and telecommunications etc. This projects attempts to study the intricacies of the Foreign Exchange Market and to develop Fundamental model of exchange rate prediction. The main purpose of this study is to give a better idea and the comprehensive details of foreign exchange market and risk management and how to predict exchange rate. The project starts with the various concept and system used in the foreign exchange market in the world. It also highlights about the exchange rate system used in various countries till date. The second part of the study focus on fundamental model of exchange rate predication and risk management techniques available.
The project then highlights the various hedging tools used by various banks and individuals to hedge their risk. The major hedging tools included are forward, options, swaps and futures.
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Sr.No. 1.
Particulars Introduction 1.1 1.2 1.3 Foreign Exchange Overview. About Foreign Exchange Market. Participants in foreign exchange
Page no.
2.
Research Methodology 2.1 Main objective 2.2 Data collection 2.3 Data analysis 2.4 Limitations of the Study. Industry Profile 3.1 Exchange Rate System. 3.2 Fundamentals in Foreign Exchange 3.3 Hedging Tools Theoretical Aspect of the study 4.1 Forecasting Exchange Rates Research Findings and Conclusions 5.1 5.2 Data Analysis Conclusions
3.
4. 5.
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6.
Bibliography 6.1 Name of Books 6.2 Name of Bulletins 6.3 Name of Websites 6.4 Search engine
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INTRODUCTION
84
FOREIGN EXCHANGE MARKET OVERVIEW

In todays world no economy is self sufficient, so there is need for exchange of goods and services amongst the different countries. So in this global village, unlike in the primitive age the exchange of goods and services is no longer carried out on barter basis. Every sovereign country in the world has a currency that is legal tender in its territory and this currency does not act as money outside its boundaries. So whenever a country buys or sells goods and services from or to another country, the residents of two countries have to exchange currencies. So we can imagine that if all countries have the same currency then there is no need for foreign exchange.
NEED FOR FOREIGN EXCHANGE

Let us consider a case where Indian company exports cotton fabrics to USA and invoices the goods in US dollar. The American importer will pay the amount in US dollar, as the same is his home currency. However the Indian exporter requires rupees means his home currency for procuring raw materials and for payment to the labor charges etc. Thus he would need exchanging US dollar for rupee. If the Indian exporters invoice their goods in rupees, then importer in USA will get his dollar converted in rupee and pay the exporter. From the above example we can infer that in case goods are bought or sold outside the country, exchange of currency is necessary. Sometimes it also happens that the transactions between two countries will be settled in the currency of third country. In that case both the countries that are transacting will require converting their respective currencies in the currency of third country. For that also the foreign exchange is required.
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ABOUT FOREIGN EXCHANGE MARKET

Particularly for foreign exchange market there is no market place called the foreign exchange market. It is mechanism through which one countrys currency can be exchange i.e. bought or sold for The currency of another country. The foreign exchange market does not have any geographic location. Foreign exchange market is described as an OTC (over the counter) market as there is no physical place where the participant meets to execute the deals, as we see in the case of stock exchange. The largest foreign exchange market is in London, followed by the New York, Tokyo, Zurich and Frankfurt. The markets are situated throughout the different time zone of the globe in such a way that one market is closing the other is beginning its operation. Therefore it is stated that foreign exchange market is functioning throughout 24 hours a day. In most market US dollar is the vehicle currency, viz., the currency sued to dominate international transaction. In India, foreign exchange has been given a statutory definition. Section 2 (b) of foreign exchange regulation ACT,1973 states: Foreign exchange means foreign currency and includes : All deposits, credits and balance payable in any foreign currency and any draft, travelers cheques, letter of credit and bills of exchange. Expressed or drawn in India currency but payable in any foreign currency. Any instrument payable, at the option of drawee or holder thereof or any other party thereto, either in Indian currency or in foreign currency or partly in one and partly in the other.
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In order to provide facilities to members of the public and foreigners visiting India, for exchange of foreign currency into Indian currency and vice-versa. RBI has granted to various firms and individuals, license to undertake money-changing business at seas/airport and tourism place of tourist interest in India. Besides certain authorized dealers in foreign exchange (banks) have also been permitted to open exchange bureaus.
Following are the major bifurcations: Full fledge moneychangers they are the firms and individuals who have been authorized to take both, purchase and sale transaction with the public. Restricted moneychanger they are shops, emporia and hotels etc. that have been authorized only to purchase foreign currency towards cost of goods supplied or services rendered by them or for conversion into rupees. Authorized dealers they are one who can undertake all types of foreign exchange transaction. Banks are only the authorized dealers. The only exceptions are Thomas cook, western union, UAE exchange which though, and not a bank is an AD. Even among the banks RBI has categorized them as follows: Branch A They are the branches that have nostro and vostro account. Branch B The branch that can deal in all other transaction but do not maintain nostro and vostro a/cs fall under this category.
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Branch C business.
such branches cannot do anything with forex
For Indian we can conclude that foreign exchange refers to foreign money, which includes notes, cheques, bills of exchange, bank balance and deposits in foreign currencies.
PARTICIPANTS IN FOREIGN EXCHANGE MARKET

The main players in foreign exchange market are as follows: 1. CUSTOMERS The customers who are engaged in foreign trade participate in foreign exchange market by availing of the services of banks. Exporters require converting the dollars in to rupee and importers
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require converting rupee in to the dollars, as they have to pay in dollars for the goods/services they have imported. 2. COMMERCIAL BANKS They are most active players in the forex market. Commercial bank dealing with international transaction offer services for conversion of one currency in to another. They have wide network of branches. Typically banks buy foreign exchange from exporters and sells foreign exchange to the importers of goods. As every time the foreign exchange bought or oversold position. The balance amount is sold or bought from the market. 3. CENTRAL BANK
In all countries Central bank have been charged with the responsibility of maintaining the external value of the domestic currency. Generally this is achieved by the intervention of the bank.
4. EXCHANGE BROKERS Forex brokers play very important role in the foreign exchange market. However the extent to which services of foreign brokers are utilized depends on the tradition and practice prevailing at a particular forex market center. In India as per FEDAI guideline the Ads are free to deal directly among themselves without going through brokers. The brokers are not among to allowed to deal in their own account allover the world and also in India. 5. OVERSEAS FOREX MARKET
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Today the daily global turnover is estimated to be more than US $ 1.5 trillion a day. The international trade however constitutes hardly 5 to 7 % of this total turnover. The rest of trading in world forex market is constituted of financial transaction and speculation. As we know that the forex market is 24-hour market, the day begins with Tokyo and thereafter Singapore opens, thereafter India, followed by Bahrain, Frankfurt, paris, London, new york, Sydney, and back to Tokyo. 6. SPECULATORS The speculators are the major players in the forex market. Bank dealing are the major pseculators in the forex market with a view to make profit on account of favorable movement in exchange rate, take position i.e. if they feel that rate of particular currento go up in short term. They buy that currency and sell it as soon as they are able to make quick profit. Corporations particularly multinational corporation and transnational corporation having business operation beyond their national frontiers and on account of their cash flows being large and in multi currencies get in to foreign exchange exposures. With a view to make advantage of exchange rate movement in their favor they either delay covering exposures or do not cover until cash flow materialize. Individual like share dealing also undertake the activity of buying and selling of foreign exchange for booking short term profits. They also buy foreign currency stocks, bonds and other assets without covering the foreign exchange exposure risk. This also result in speculations.
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Research Methodology
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Research Methodology
OBJECTIVES
This project attempts To study the intricacies of the foreign exchange market. To develop fundamental model of exchange rate prediction. To know the trend of exchange rate fluctuation. To know about the various concepts and technicalities in foreign exchange. To get the knowledge about the hedging tools used in foreign exchange.
DATA COLLECTION
Secondary data collection From 1. Books 2. Websites 3. Journals and Bulletins
DATA ANALYSIS
Data are analyzed by brainstorming
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LIMITATIONS OF THE STUDY

As project concerned with Indo-US data but Rupee is not fully convertible so monetary approach to exchange rate may lead to error. Some data are taken by interpolations so it can have some amount of error. Some where in the data are converted from financial year to Annual form. Some places data are approximated to match the date as per requirement.
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INDUSTRY PROFILE
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EXCHANGE RATE SYSTEM
INTRODUCTION
Countries of the world have been exchanging goods and services amongst themselves. This has been going on from time immemorial. The world has come a long way from the days of barter trade. With the invention of money the figures and problems of barter trade have disappeared. The barter trade has given way ton exchanged of goods and services for currencies instead of goods and services. The rupee was historically linked with pound sterling. India was a founder member of the IMF. During the existence of the fixed exchange rate system, the intervention currency of the Reserve Bank of India (RBI) was the British pound, the RBI ensured maintenance of the exchange rate by selling and buying pound against rupees at fixed rates. The inter bank rate therefore ruled the RBI band. During the fixed exchange rate era, there was only one major change in the parity of the rupeedevaluation in June 1966. Different countries have adopted different exchange rate system at different time. The following are some of the exchange rate system followed by various countries.
THE GOLD STANDARD

Many countries have adopted gold standard as their monetary system during the last two decades of the 19th century. This system was in vogue till the outbreak of world war 1. under this system the parties of currencies were fixed in term of gold. There were two main types of gold standard:
1) gold specie standard
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Gold was recognized as means of international settlement for receipts and payments amongst countries. Gold coins were an accepted mode of payment and medium of exchange in domestic market also. A country was stated to be on gold standard if the following condition were satisfied: Monetary authority, generally the central bank of the country, guaranteed to buy and sell gold in unrestricted amounts at the fixed price. Melting gold including gold coins, and putting it to different uses was freely allowed. Import and export of gold was freely allowed. The total money supply in the country was determined by the quantum of gold available for monetary purpose. 2) Gold Bullion Standard Under this system, the money in circulation was either partly of entirely paper and gold served as reserve asset for the money supply.. However, paper money could be exchanged for gold at any time. The exchange rate varied depending upon the gold content of currencies. This was also known as Mint Parity Theory of exchange rates. The gold bullion standard prevailed from about 1870 until 1914, and intermittently thereafter until 1944. World War I brought an end to the gold standard.
BRETTON WOODS SYSTEM

During the world wars, economies of almost all the countries suffered. In ordere to correct the balance of payments disequilibrium, many countries devalued their currencies. Consequently, the international trade suffered a deathblow. In 1944, following World War II, the United
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States and most of its allies ratified the Bretton Woods Agreement, which set up an adjustable parity exchange-rate system under which exchange rates were fixed (Pegged) within narrow intervention limits (pegs) by the United States and foreign central banks buying and selling foreign currencies. This agreement, fostered by a new spirit of international cooperation, was in response to financial chaos that had reigned before and during the war. In addition to setting up fixed exchange parities (par values) of currencies in relationship to gold, the agreement established the International Monetary Fund (IMF) to act as the custodian of the system. Under this system there were uncontrollable capital flows, which lead to major countries suspending their obligation to intervene in the market and the Bretton Wood System, with its fixed parities, was effectively buried. Thus, the world economy has been living through an era of floating exchange rates since the early 1970.
FLOATING RATE SYSTEM

In a truly floating exchange rate regime, the relative prices of currencies are decided entirely by the market forces of demand and supply. There is no attempt by the authorities to influence exchange rate. Where government interferes directly or through various monetary and fiscal measures in determining the exchange rate, it is known as managed of dirty float.
PURCHASING POWER PARITY (PPP)

Professor Gustav Cassel, a Swedish economist, introduced this system. The theory, to put in simple terms states that currencies are valued for
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what they can buy and the currencies have no intrinsic value attached to it. Therefore, under this theory the exchange rate was to be determined and the sole criterion being the purchasing power of the countries. As per this theory if there were no trade controls, then the balance of payments equilibrium would always be maintained. Thus if 150 INR buy a fountain pen and the samen fountain pen can be bought for USD 2, it can be inferred that since 2 USD or 150 INR can buy the same fountain pen, therefore USD 2 = INR 150. For example India has a higher rate of inflation as compaed to country US then goods produced in India would become costlier as compared to goods produced in US. This would induce imports in India and also the goods produced in India being costlier would lose in international competition to goods produced in US. This decrease in exports of India as compared to exports from US would lead to demand for the currency of US and excess supply of currency of India. This in turn, cause currency of India to depreciate in comparison of currency of Us that is having relatively more exports.
FUNDAMENTALS IN EXCHANGE RATES

METODS OF QOUTING RATE
Exchange rate is a rate at which one currency can be exchange in to another currency, say USD = Rs.48. This rate is the rate of conversion of US dollar in to Indian rupee and vice versa. EXCHANGE QUOTATION
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______________________
DIRECT
INDIRECT
VARIABLE UNIT
VARIABLE UNIT
HOME CURRENCY
FOREIGN CURRENCY
There are two methods of quoting exchange rates. 1) Direct methods Foreign currency is kept constant and home currency is kept variable. In direct quotation, the principle adopted by bank is to buy at a lower price and sell at higher price. 2) In direct method: Home currency is kept constant and foreign currency is kept variable. Here the strategy used by bank is to buy high and sell low. In India with effect from august 2, 1993 all the exchange rates are quoted in direct method. It is customary in foreign exchange market to always quote two rates means one for buying and another rate for selling. This helps in eliminating the risk of being given bad rates i.e. if a party comes to know what the other party intends to do i.e. buy or sell, the former can take the letter for a ride.
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There are two parties in an exchange deal of currencies. To initiate the deal one party asks for quote from another party and other party quotes a rate. The party asking for a quote is known as asking party and the party giving a quotes is known as quoting party. The advantage of twoway quote is as under i. ii. The market continuously makes available price for buyers or sellers Two way price limits the profit margin of the quoting bank and comparison of one quote with another quote can be done instantaneously. iii. As it is not necessary any player in the market to indicate whether he intends to buy or sale foreign currency, this ensures that the quoting bank cannot take advantage by manipulating the prices. iv. v. ` In two way quotes the first rate is the rate for buying and another for selling. We should understand here that, in India the banks, which are authorized dealer always, quote rates. So the rates quoted- buying and selling is for banks point of view only. It means that if exporters want to sell the dollars then the bank will buy the dollars from him so while calculation the first rate will be used which is Buying rate, as the bank is buying the dollars from exporter. The same case will happen inversely with importer as he will buy dollars from the bank and bank will sell dollars to importer. It automatically insures that alignment of rates with market rates. Two way quotes lend depth and liquidity to the market, which is so very essential for efficient market.
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FACTOR AFFECTINGN EXCHANGE RATES

In free market, it is the demand and supply of the currency which should determine the exchange rates but demand and supply is the dependent on many factors, which are ultimately the cause of the exchange rate fluctuation, some times wild. The volatility of exchange rates cannot be traced to the single reason and consequently, it becomes difficult to precisely define the factors that affect exchange rates. However, the more important among them are as follows: STRENGTH OF ECONOMY
Economic factors affecting exchange rates include hedging activities, interest rates, inflationary pressures, trade imbalance, and euro market activities. Irving fisher, an American economist, developed a theory relating exchange rates to interest rates. This proposition, known as the fisher effect, states that interest rate differentials tend to reflect exchange rate expectation. On the other hand, the purchasing- power parity theory relates exchange rates to inflationary pressures. In its absolute version, this theory states that the equilibrium exchange rate equals the ratio of domestic to foreign prices. The relative version of the theory relates changes in the exchange rate to changes in price ratios.
POLITICAL FACTOR
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The political factor influencing exchange rates include the established monetary policy along with government action on items such as the money supply, inflation, taxes, and deficit financing. Active government intervention or manipulation, such as central bank activity in the foreign currency market, also have an impact. Other political factors influencing exchange rates include the political stability of a country and its relative economic exposure (the perceived need for certain levels and types of imports). Finally, there is also the influence of the international monetary fund.
EXPACTATION OF THE FOREIGN EXCHANGE MARKET
Psychological factors also influence exchange rates. These factors include market anticipation, speculative pressures, and future expectations. A few financial experts are of the opinion that in todays environment, the only trustworthy method of predicting exchange rates by gut feel. Bob Eveling, vice president of financial markets at SG, is corporate finances top foreign exchange forecaster for 1999. evelings gut feeling has, defined convention, and his method proved uncannily accurate in foreign exchange forecasting in 1998.SG ended the corporate finance forecasting year with a 2.66% error overall, the most accurate among 19 banks. The secret to evelings intuition on any currency is keeping abreast of world events. Any event,from a declaration of war to a fainting political leader, can take its toll on a currencys value. Today, instead of formal modals, most forecasters rely on an amalgam that is part economic fundamentals, part model and part judgment. Fiscal policy Interest rates Monetary policy
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Balance of payment Exchange control Central bank intervention Speculation Technical factors
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HEDGING TOOLS
INTRODUCTION
Consider a hypothetical situation in which ABC trading co. has to import a raw material for manufacturing goods. But this raw material is required only after three months. However, in three months the price of raw material may go up or go down due to foreign exchange fluctuations and at this point of time it can not be predicted whether the price would go up or come down. Thus he is exposed to risks with fluctuations in forex rate. If he buys the goods in advance then he will incur heavy interest and storage charges. However, the availability of derivatives solves the problem of importer. He can buy currency derivatives. Now any loss due to rise in raw material price would be offset by profits on the futures contract and viceversa. Hence, the derivatives are the hedging tools that are available to companies to cover the foreign exchange exposure faced by them.
Definition of Derivatives
Derivatives are financial contracts of predetermined fixed duration, whose values are derived from the value of an underlying primary financial instrument, commodity or index, such as : interest rate, exchange rates, commodities, and equities. Derivatives are risk shifting instruments. Initially, they were used to reduce exposure to changes in foreign exchange rates, interest rates, or stock indexes or commonly known as risk hedging. Hedging is the most important aspect of derivatives and also its basic economic purpose. There has to be counter party to hedgers and they are speculators.
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Derivatives have come into existence because of the prevalence of risk in every business. This risk could be physical, operating, investment and credit risk. Derivatives provide a means of managing such a risk. The need to manage external risk is thus one pillar of the derivative market. Parties wishing to manage their risk are called hedgers.
The common derivative products are forwards, options, swaps and futures.
1. Forward Contracts
Forward exchange contract is a firm and binding contract, entered into by the bank and its customers, for purchase of specified amount of foreign currency at an agreed rate of exchange for delivery and payment at a future date or period agreed upon at the time of entering into forward deal. The bank on its part will cover itself either in the interbank market or by matching a contract to sell with a contract to buy. The contract between customer and bank is essentially written agreement and bank generally stand to make a loss if the customer defaults in fulfilling his commitment to sell foreign currency. A foreign exchange forward contract is a contract under which the bank agrees to sell or buy a fixed amount of currency to or from the company on an agreed future date in exchange for a fixed amount of another currency. No money is exchanged until the future date.
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A company will usually enter into forward contract when it knows there will be a need to buy or sell for an currency on a certain date in the future. It may believe that todays forward rate will prove to be more favourable than the spot rate prevailing on that future date. Alternatively, the company may just want to eliminate the uncertainity associated with foreign exchange rate movements. The forward contract commits both parties to carrying out the exchange of currencies at the agreed rate, irrespective of whatever happens to the exchange rate. The rate quoted for a forward contract is not an estimate of what the exchange rate will be on the agreed future date. It reflects the interest rate differential between the two currencies involved. The forward rate may be higher or lower than the market exchange rate on the day the contract is entered into.
Forward rate has two components. Spot rate Forward points Forward points, also called as forward differentials, reflects the interest differential between the pair of currencies provided capital flow are freely allowed. This is not true in case of US $ / rupee rate as there is exchange control regulations prohibiting free movement of capital
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from / into India. In case of US $ / rupee it is pure demand and supply which determines forward differential. Forward rates are quoted by indicating spot rate and premium / discount. In direct rate, Forward rate = spot rate + premium / - discount.
Example:
The inter bank rate for 31st March is 44.60 Premium for forwards are as follows. Month April May June Paise 40/42 65/67 87/88
If a one month forward is taken then the forward rate would be 44.60 + .42 = 49.12 If a two months forward is taken then the forward rate would be 44.60. + .67 = 49.37. If a three month forward is taken then the forward rate would be 44.60 + .88 = 49.58.
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Example:
Lets take the same example for a broken date Forward Contract Spot rate = 48.70 for 31st March. Premium for forwards are as follows 30th April 31st May 30th June 48.70 + 0.42 48.70 + 0.67 48.87 + 0.88
For 17th May the premium would be (0.67 0.42) * 17/31 = 0.137 Therefore the premium up to 17th May would be 48.70 + 0.807 = 49.507. Premium when a currency is costlier in future (forward) as compared to spot, the currency is said to be at premium vis--vis another currency. Discount when a currency is cheaper in future (forward) as compared to spot, the currency is said to be at discount vis--vis another currency.
Example:
A company needs DEM 235000 in six months time. Market parameters : Spot rate IEP/DEM 2.3500 Six months Forward Rate IEP/DEM 2.3300
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Solutions available: The company can do nothing and hope that the rate in six months time will be more favorable than the current six months rate. This would be a successful strategy if in six months time the rate is higher than 2.33. However, if in six months time the rate is lower than 2.33, the company will have to loose money.
It can avoid the risk of rates being lower in the future by entering into a forward contract now to buy DEM 235000 for delivery in six months time at an IEP/DEM rate of 2.33. It can decide on some combinations of the above.
Various options available in forward contracts:

A forward contract once booked can be cancelled, rolled over, extended and even early delivery can be made.
Roll over forward contracts

Rollover forward contracts are one where forward exchange contract is initially booked for the total amount of loan etc. to be re-paid. As and when installment falls due, the same is paid by the customer at the exchange rate fixed in forward exchange contract. The balance amount of the contract rolled over till the date for the next installment. The process of extension continues till the loan amount has been re-paid. But the extension is available subject to the cost being paid by the customer. Thus, under the mechanism of roll over contracts, the exchange rate protection is provided for the entire period of the contract
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and the customer has to bear the roll over charges. The cost of extension (rollover) is dependent upon the forward differentials prevailing on the date of extension. Thus, the customer effectively protects himself against the adverse spot exchange rates but he takes a risk on the forward differentials. (i.e. premium/discount). Although spot exchange rates and forward differentials are prone to fluctuations, yet the spot exchange rates being more volatile the customer gets the protection against the adverse movements of the exchange rates. A corporate can book with the Authorised Dealer a forward cover on rollover basis as necessitated by the maturity dates of the underlying transactions, market conditions and the need to reduce the cost to the customer.
Example:
An importer has entered into a 3 months forward contract in the month of February.
Spot Rate = 48.65 Forward premium for 3 months (May) = 0.75 Therefore rate for the contract = 48.65 + 0.75 = 49.45
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Suppose, in the month of May the importer realizes that he will not be able to make the payment in May, and he can make payment only in July. Now as per the guidelines of RBI and FEDAI he can cancel the contract, but he cannot re-book the contract. So for this the importer will go for a roll-over forward for May over July. The premium for May is 0.75 (sell) and the premium for July is 0.95 (buy). Therefore the additional cost i.e. (0.95 0.75) = 0.25 will have to be paid to the bank. The bank then fixes a notional rate. Lets say it is 48.66. Therefore in May he will sell 48.66 + 0.75 = 49.41 And in July he will buy 48.66 + 119.75 = 49.85 Therefore the additional cost (49.85 49.41) = 0.4475 will have to be paid to the Bank by the importer.
Cancellation of Forward Contract

A corporate can freely cancel a forward contract booked if desired by it. It can again cover the exposure with the same or other Authorised Dealer. However contracts relating to non-trade transaction\imports with one leg in Indian rupees once cancelled could not be rebooked till now. This regulation was imposed to stem bolatility in the foreign exchange market, which was driving down the rupee. Thus the whole objective behind this was to stall speculation in the currency.
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But now the RBI has lifted the 4-year-old ban on companies re-booking the forward transactions for imports and non-traded transactions. It has been decided to extend the freedom of re-booking the import forward contract up to 100% of un-hedged exposures Falling due within one year, subject to a cap of $ 100 Mio in a financial year per corporate. The removal of this ban would give freedom to corporate Treasurers who sould be in apposition to reduce their foreign exchange risks by canceling their existing forweard transactions and re-booking them at better rates. Thus this in not liberalization, but it is restoration of the status quo ante. Also the Details of cancelled forward contracts are no more required to be reported to the RBI. The following are the guidelines that have to be followee in case of cancellation of a forward contract. 1.) In case of cancellation of a contract by the client (the request
should be made on or before the maturity date) the Authorised Dealer shall recover/pay the, as the case may be, the difference between the contracted rate and the rate at which the cancellation is effected. The recovery/payment of exchange difference on canceling the contract may be up front or back ended in the discretion of banks. 2.) Rate at which the cancellation is to be effected : Purchase contracts shall be cancelled at the contracting
Authorised Dealers spot T.T. selling rate current on the date of cancellation.
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Sale contract shall be cancelled at the contracting Authorised Dealers spot T.T. selling rate current on the date of cancellation. Where the contract is cancelled before maturity, the appropriate forward T.T. rate shall be applied.
3.)
Exchange difference not exceeding Rs. 100 is being ignored by the
contracting Bank. 4.) In the absence of any instructions from the client, the contracts,
which have matured, shall be automatically cancelled on 15th day falls on a Saturday or holiday, the contract shall be cancelled on the next succeeding working day.
In case of cancellation of the contract

1.) 2.) Swap, cost if any shall be paid by the client under advice to him. When the contract is cancelled after the due date, the client is not
entitled to the exchange difference, if any in his favor, since the contract is cancelled on account of his default. He shall however, be liable to pay the exchange difference, against him.
Early Delivery Suppose an Exporter receives an Export order worth USD 500000 on 30/06/2000 and expects shipment of goods to take place on 30/09/2000. On 30/06/200 he sells USD 500000 value 30/09/2000 to cover his FX exposure.
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Due to certain developments, internal or external, the exporter now is in a position to ship the goods on 30/08/2000. He agrees this change with his foreign importer and documents it. The problem arises with the Bank as the exporter has already obtained cover for 30/09/2000. He now has to amend the contract with the bank, whereby he would give early delivery of USD 500000 to the bank for value 30/08/2000. i.e. the new date of shipment. However, when he sold USD value 30/09/2000, the bank did the same in the market, to cover its own risk. But because of early delivery by the customer, the bank is left with a long mismatch of funds 30/08/2000 against 30/09/2000, i.e. + USD 500000 value 30/08/2000 (customer deal amended) against the deal the bank did in the inter bank market to cover its original risk USD value 30/09/2000 to cover this mismatch the bank would make use of an FX swap.
The swap will be 1.) 2.) Sell USD 500000 value 30/08/2000. Buy USD 500000 value 30/09/2000
The opposite would be true in case of an importer receiving documents earlier than the original due date. If originally the importer had bought USD value 30/09/2000 on opening of the L/C and now expects receipt of documents on 30/08/2000, the importer would need to take early delivery of USD from the bank. The Bank is left with a short mismatch of funds 30/08/2000 against 30/09/2000. i.e. USD 500000 value
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(customer deal amended) against the deal the bank did in the inter bank market to cover its original risk + USD 500000 To cover this mismatch the vank would make use of an FX swap, which will be ; 1. Buy USD value 30/08/2000. 2. Sell USD value 30/09/2000. The swap necessitated because of early delivery may have a swap cost or a swap difference that will have to be charged / paid by the customer. The decision of early delivery should be taken as soon as it becomes known, failing which an FX risk is created. This means that the resultant swap can be spot versus forward (where early delivery cover is left till the very end) or forward versus forward. There is every likelihood that the origial cover ratre will be quite different from the maket rates when early delivery is requested. The difference in rates will create a cash outlay for the bank. The interest cost or gain on the cost outlay will be charged / paid to the customer. Substitution of Orders The substitution of forward contracts is allowed. In case shipment under a particular import or export order in respect of which forward cover has been booked does not take place. The corporate can be permitted to substitute another order under the same forward contract, provided that the proof of the genuineness of the transaction is given.
Advantages of using forward contracts:
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They are useful for budgeting, as the rate at which the company will buy or sell is fixed in advance. There is no up-front premium to pay whn using forward contracts. The contract can be drawn up so that the exchange takes place on any agreed working day.
Disadvantages of forward contracts: They are legally binding agreements that must be honoured regardless of the exchange rate prevailing on the actual forward contract date. They may not be suitable where there is uncertainty about future cash flows. For example, if a company tenders for a contract and the tender is unsuccessful, all obligations under the Forward Contract must still be honoured.
2. OPTIONS
An option is a Contractual agreement that gives the option buyer the right, but not the obligation, to purchase (in the case of a call option) or to sell (in the case of put option) a specified instrument at a specified price at any time of the option buyers choosing by or before a fixed date in the future. Upon exercise of the right by the option holder, and option seller is obliged to deliver the specified instrument at a specified price. The option is sold by the seller (writer) To the buyer (holder) In return for a payment (premium) Option lasts for a certain period of time the right expires at its maturity
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Options are of two kinds 1.) Put Options 2.) Call Options
PUT OPTIONS The buyer (holder) has the right, but not an obligation, to sell the underlying asset to the seller (writer) of the option. CALL OPTIONS The buyer (holder) has the right, but not the obligation to buy the underlying asset from the seller (writer) of the option. STRIKE PRICE Strike price is the price at which calls & puts are to be exercised (or walked away from) AMERICAN & EUROPEAN OPTIONS American Options The buyer has the right (but no obligation) to exercise the option at any time between purchase of the option and its maturity.
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European Options The buyer has the right (but no obligations) to exercise the option at maturity only. UNDERLYING ASSETS : Physical commodities, agriculture products like wheat, plus metal, oil. Currencies. Stock (Equities)
INTRINSIC VALUE: It is the value or the amount by which the contract is in the option. When the strike price is better than the spot price from the buyers perspective.
Example: If the strike price is USD 5 and the spot price is USD 4 then the buyer of put option has intrinsic value. By the exercising the option, the buyer of the option, can sell the underlying asset at USD 5 whereas in the spot market the same can be sold for USD 4. The buyers intrinsic value is USD 1 for every unit for which he has a right to sell under the option contract.
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IN, OUT, AT THE MONEY: In-the-money: An option whose strike price is more favorable than the current market exchange rate is said to be in the money option. Immediate exercise of such option results in an exchange profit. Example: If the US $ call price is (put) 1 = (call) US $ 1.5000 and the market price is 1 = US $ 1.4000, the exercise of the option by purchaser of US $ call will result in profit of US $ 0.1000 per pound. Such types of option contract is offered at a higher price or premium. Out-of-the-money: If the strike price of the option contract is less favorable than the current market exchange rate, the option contract is said to be out-of-themoney to its market price.
At-the-money: If the market exchange rate and strike prices are identical then the option is called to be at-the-money option. In the above example, if the market price is 1 = US $ 1.5000, the option contract is said to be at the money to its market place. Summary
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Prices Spot>Strike Spot=Strike Spot<Strike Naked Options:
Calls in-the-money at-the-money out-of-the-money out-of-the-money at-the-money in-the-money
Puts
A naked option is where the option position stands alone, it is not used in the conjunction with cash marked position in the underlying asset, or another potion position. Pay-off for a naked long call: A long call, i.e. the purchaser of a call (option), is an option to buy the underlying asset at the strike price. This is a strategy to take advantage of any increase in the price of the underlying asset. Example: Current spot price of the underlying asset : 100 Strike price : 100 Premium paid by the buyer of the call : 5 (Scenario-1) If the spot price at maturity is below the strike price, the option will not be exercised (since buying in the spot is more advantageous). Buyer will lose the premium paid.
(Scenario-2)
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If the spot price is equal to strike price (on maturity), there is no reason to exercise the option. Buyer loses the premium paid. (Scenario-3) If the spot price is higher than the strike price at the time of maturity, the buyer stands to gain in exercising the option. The buyer can buy the underlying asset at strike price and sell the same at current market price thereby make profit. However, it may be noted that if on maturity the spot price is less than the INR 43.52 (inclusive of the premium) the buyer will stand to loose.
CURRENCY OPTIONS
A currency option is a contract that gives the holder the right (but not the obligation) to buy or sell a fixed amount of a currency at a given rate on or before a certain date. The agreed exchange rate is known as the strike rate or exercise rate. An option is usually purchased for an up front payment known as a premium. The option then gives the company the flexibility to buy or sell at the rate agreed in the contract, or to buy or sell at market rates if they are more favorable, i.e. not to exercise the option.
How are Currency Options are different from Forward Contracts?
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A Forward Contract is a legal commitment to buy or sell a fixed amount of a currency at a fixed rate on a given future date. A Currency Option, on the other hand, offers protection against unfavorable changes in exchange raters without sacrificing the chance of benefiting from more favorable rates. Types of Options :
A Call Option is an option to buy a fixed amount of currency. A Put Option is an option to sell a fixed amount of currency. Both types of options are available in two styles : 1. The American style option is an option that can be exercised at any time before its expiry date. 2. The European style option is an option that can only be exercised at the specific expiry date of the option.
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Option premiums : By buying an option, a company acquires greater flexibility and at the same time receives protection against unfavorable changes in exchange rates. The protection is paid for in the form of a premium.
Example: A company has a requirement to buy USD 1000000 in one months time. Market parameters: Current Spot Rate is 1,600 one month forward rate is 1.6000
Solutions available:
Do nothing and buy at the rate on offer in one months time. The company will gain if the dollar weakens (say 1.6200) but will lose if it strengthens (say 1.5800). Enter into a forward contract and buy at a rate of 1.6000 for exercise in one months time. In company wil gain if the dollar strengthens, but will lose if it weakens. But a call option with a strike rate of 1.6000 for exercise in one months time. In this case the company can buy in one months time at whichever rate is more attractive. It is protected if the dollar strengthens and still has the chance to benefit if it weakens. How does the option work? The company buys the option to buy USD 1000000 at a rate of 1.6000 on a date one month in the future (European Style). In this example, lets assume that the option premium quoted is 0.98 % of the USD
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amount (in this case USD 1000000). This cost amounts to USD 9800 or IEP 6125. Outcomes:
If, in one months time, the exchange rate is 1.5000, the cost of buying USD 1000000 is IEP 666,667. However, the company can exercise its Call Option and buy USD 1000000 at 1.6000. So, the company will only have to pay IEP 625000 to buy the USD 1000000 and saves IEP 41667 over the cost of buying dollars at the prevailing rate. Taking the cost of the potion premium into account, the overall net saving for the company is IEP 35542. On the other hand, if the exchange rate in one month time is 1.7000. The company can choose not to exercise the Call Option and can buy USD 1000000 at the prevailing rate of 1.7000. The company pays IEP 588235 for USD 1000000 and saves IEP 36765 over the cost of forward cover at 1.6000. The company has a net saving of IEP 30640 after taking the cost of the option premium into account. In a world of changing and unpredictable exchange rates, the payment of a premium can be justified by the flexibility that options provide.
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MAKING THE MOST OF OPTIONS

Options are particularly flexible: The buyer can choose any strike rate and any end date. The management of an option position can be made even more flexible with the following techniques :
Selling back an option
The bank will at any time quote a price at which it is prepared to buy back an option it has sold. The valued of the option can be paid directly to the holder or can be incorporated in the rate on any new spot or forward deals done at the time.
Extending or shortening an option
The expiry date on an option can be changed, usually with payment of premium, either by the company to the bank (for an extension) or by the bank to the company (for shortening). A payment of premium can be avoided by adjusting the strike rate when the expiry date is altered.
Changing other features of an option
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In principle, any feature of an option may be changed at any tiem (strike rate, option amount), with a resulting payment of premium in one direction or the other.
Uses of Options
On account of market volatility, if one is not very sure of the rates, option contract is useful to limit losses and gives access to unlimited profit potential. In calm markets, writing of options is a profitable business with relatively low risk. Options contracts are ideal when tendering for a business contract where the outcome is uncertain. Options are useful in carrying out ongoing transactions where exposures are uncertain in terms of timings amounts etc. Option provides the best tool to hedge balance sheet translation exposure. Options are useful for hedging foreign currency loan exposures.
OPTIONS- Indian Scene
In the past, Indian market other than currency market has experienced derivative instruments in the form of futures, etc. The process of globalisation and integration of Indian Financial sector with the global economy has opened up vast potential of the world currency markets in the business, expecially the matured, highly liquid and competitive markets of currency options. The successful management of stability of rupee exchange rate against the US dollar dampened the sentiments of volatility of $/rupee rate. Stability of exchange rate stimulates growth of international trade in good/services, investment flows etc. The volatility and vulnerability of
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rupee against the currencies other than the US dollar is beyond management in terms of exchange rate stability of rupee. Considering this aspect and also the maturity of the world currency options market, the RBI introduced the cross currency options with effect from January 1994 in terms of its AD.
The main features are: At present Indian residents can buy cross currency options only to hedge their foreign exchange exposures in non-US dollar currencies. Corporate can buy but cannot write options.
Due to certain structural deficiencies of the Financial markets in India; the RBI has not permitted rupee-based currency options. Options are allowed to be bought by clients only to cover their genuine exposures. Banks selling currency options have to hedge themselves immediately on back-to-back basis. The managing committee of FEDAI adopted, with certain modifications, International Currency Options Master(ICOM) agreement of British Bankers Association, London for cross currency options market in India. The cross currency options market is still in an infancy stage in India and the initial euphoria over cross currency subsided on account of the following factors. The RBI introduced cross currency options in non US dollar currencies for covering genuine exposures of the corporate. Nearly 60 to 70% of the corporate exposures are denominated in the US
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dollar. As a result major of the corporate exposures did not require currency options as a hedging tool. Reluctance of the corporates to part with the front-end fee as the price for purchase of an option contract. The premium or price of the currency option contract is higher than the expectation of the corporates about the volatility of currency movements. Rigidities attached to the cross currency option contract deals. Absence of long term rupee yield curve, structural deficiencies of the financial market. The most important problem is the absence of rupee based currency options. The above factors have certainly shunted the growth of cross currency options as a first derivative product on the Indian Foreign Exchange market.
Earlier Indian corporate clients had only two options to manage foreign exchange risk.
To do nothing till the maturity of the transactions of To book a forward contract and settle the transaction at contracted date of maturity of the contract. However, today corporate have additional tool at their disposal in the form of cross currency option for managing their currency exposures. Introduction of cross currency options is a certain raiser and its subsequent development application in the currency market will bring in
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onslaught of complex derivative products for both the corporates as well as the bankers. Example: Suppose French company expects to pay against it imports, USD 10,000,000 in six months time. They expect US $ to fall but do not want to take the chance of being wrong. Current market rates Spot USD/FRF 6 months USD/FRF 6.9150 6.9450
A 6 month at the money USD call/FRF put option contract costs 1 % The strike price would therefore be 6.9450 Option Premium is 10,000,000 * 1 % = FRF 691,500 The choices that the company has are : Do nothing (aggressive). Buy USD/sell FRF Forward (defensive) @ 6.9450 Hedge is means of the option (selective) USD Put/CHF call costs 1 % In six months time Case I: Spot USD/FRF = 7.0550 Choice 1 Where the company did nothing tthey buy USD from the market and pay USD 10,000,000 * 7.0550 = FRF 70,550,000.
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Choice 2 Where the company bought forward they pay 10,000,000 * 6.9450 = FRF 69,450,000. Choice 3 Where the company hedged the option they exercise the option to buy USD and pay FRF 69,450,000 plus Option Premium FRF 691,500. Case II: Spot USD/FRF = 6.9450 Choice 1 Where the company did nothing they buy USD from the market and pay 10,000,000 * 6.9450 = FRF 69,450,000. Choice 2 Where the company bought forward USD they pay 10,000,000 * 6.9450 = FRF 69,45,000. Choice 3 Where the company hedge with option, whether the exercise the option or not they pay FRF 69,450,000 + the option premium = FRF 70,141,500. Case III: Spot USD/FRF = 6.8500 Choice 1
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Where the company bought forward USD from the market and pay 10,000,000 * 6.8500 = FRF 68,500,000. Choice 2 Where the company bought forward USD they pay 10,000,000 * 6.9450 = FRF 69,45,000.
Choice 3 Where the company hedge with option, they dont exercise the option but buy USD from the market and pay FRF 68,500,00 + the option premium = FRF 69,191,500.
Choice
Case 1
Case 2
Case 3 USD/FRF
USD/FRF7.0550 USD/FRF 6.9450 1. Nothing 70,550,000 2. Forward 69,450,000 3. Option 70,141,500 Choice 2 is best 69,450,000 64,450,000 70,141,000 Choices 1 best
6.8500 68,500,000 69,450,000 69,191,500 & 2 are Choice 1 is best
Thus the general rule for hedging exposures with options is that with hindsigtht one can deduce that there was always a better strategy. The question to be asked is what the risk is and does the option premium justify it ? Beside, always look at an option as an insurance policy, it never qualifies as a good investment but always provides protection against the unknown.
3. SWAPS
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WHY DID SWAPS EMERGE? In the late 1970s, the first currency swap was engineered to circumvent the currency control imposed in the UK. A tax was levied on overseas investments to discourage capital outflows. Therefore, a British company could not transfer funds overseas in order to expand its foreign operations without paying sizeable penalty. Moreover, this British company had to take an additional currency risks arising from servicing a sterling debt with foreign currency cash flows. To overcome such a predicament, back-to-back loans were used to exchange debts in different currencies. For example, a British company wanting to raise capital in the Frace would raise the capital in the UK and exchange its obligations with a French company, which was in a reciprocal position. Though this type of arrangement was providing relief from existing protections, one could imagine, the task of locating companies with matching needs was quite difficult in as much as the cost of such transactions was high. In addition, back-to-back loans
required drafting multiple loan agreements to strate respective loan obligations with clarity. However this type of arrangement leads to development of more sophisticated swap market of today.
WHAT ARE SWAPS?
A contract between two parties, referred to as counter parties, to exchange two streams of payments for agreed period of time. The payments, commonly called legs or sides, are calculated based on the underlying notional using applicable rates. Swaps contracts also include other provisional specified by the counter parties. Swaps are not debt instrument to raise capital, but a tool used for financial management. Swaps are arranged in many different currencies and different periods of time. US $ swaps are most common followed by Japanese yen, sterling
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and Deutsche marks. The length of past swaps transacted has ranged from 2 to 25 years.
PRESENT SCENARIO IN THE INDIAN MARKET
Genesis of the Interest Rate Swaps in India
Interest rates in India have been RBI determined for decades now. In the past five years, we have seen this situation changing. Gradually, India is moving towards a market determined interest rate regime. RBI is gradually freeing interest rates, and this has forced banks to manage risks on their own. Moreover, the Indian companies were used to the earlier easy go approach and surety in interest rates that they can borrow on. But now, corporate have a plethora of rates at which they can borrow. They have the option of loans linked to fixed or floating rates. Thus, Indian companies have to be se efficient with regards to management fo financial uncertainities, like s are elsewhere in the world. With all this deregulation and integration with global practices, there was a felt needs for Instruments to hedge against various risks. Derivatives for the money market were the next logical step in the process. This is exactly what RBI has done.
The RBI Governors Statement on Mid Term Review of Monetary and Credit Policy for 1998-99 announced on October 30, 1998, indicated that to further deepening the money market and to enable banks, primary dealers (PDs) and all India financial instituti9ons (FIs) to hedge interest risks, the RBI had decided to create an environment that would favor the introduction of Interest Rate Swaps.
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Accordingly, on July 7, 1999 RBI issued final guidelines to introduce IRS and Forward Rate Agreements (FRAs). The players are allowed to practice IRS/FRAs as product for their own balance sheet management and for market making purposes.
The RBI has been criticized for being hasty in introducing such interest rate derivatives. It was said that our debt market is not mature enough to incorporate and deal with such products. Though the Indian debt market has not been properly developed, blaming the RBI move does not seem to be proper because there products will have to be introduced sooner or later and the present time appears to be as good a time as any other. Moreover, this move may also help in quickening the development of a mature debt and money market.
The legal framework: RBI Guidelines (summary)
A brief summary of RBI guidelines regarding IRS issued on July 7, 1999 follows :
Interest rate swap refers to a financial contract between two parties exchanging a stream of interest payments for a notional principal amount on multiple occasions during a specified period. Forward rate agreement (FRA) is being defined as the same on settlement date for a specified period from start date to maturity date.
The players:
Scheduled commercial banks excluding regional rural banks, primary dealers (PDs) and all India financial institutions have been allowed to 137
undertake IRS as a product of their own asset liability management and market-making purposes.
Types:
Banks/PDs/FIs undertake different types of plain vanilla FRAs/IRS for interest rate risks arising on account of landings or borrowings made at fixed or variable interest rates. However, swaps having explicit/implicit option features like caps, floors or collars are not permitted.
Benchmark Rate:
The players can use any domestic money or debt market rates as reference rate for entering into FRA/IRS, provided methodology of computing the rate is objective, transparent and mutually acceptable to counter parties. The reason stated for the same is that the benchmark rate is expected to evolve on its own in the market.
Size of the notional principal amount :
There will be no limit on the maximum or minimum size of the notional principal amount of FRA/IRS or the tenor of the IRS/FRAs. Regarding the exposure limits the banks; FIs and PDs have to arrive at the credit equivalent amount for the purpose of reckoning exposure to counter party.
Exposure:
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The exposure should be within the sublimits and the participants concerned should fix this for the FRAs/IRS to corporate/FIs, banks/PDs. In case of the banks and the FIs, the credit exposure should be within the single/group borrower limits as prescribed by the RBI.
Facilitators
The problem of locating potential counter parties was solved through dealers and brokers. A swap dealer takes on one side of the transaction as counter party. Dealers work for investment, commercial or merchant banks. By positioning the Swap, dealers earn bid-ask spread for the service. In other words, the swap dealer earns the difference between the amount received from a party and the amount paid to the other party. In an ideal situation, the dealer would offset his risks by matching one step with another to streamline his payments. If the dealer were a counter party paying fixed rate payments and receiving floating rate payments, he would prefer to be a counter party receiving fixed payments and paying floating rate payments in another swap. A perfectly netted position as just described is not necessary. Dealers have the flexibility to cover their exposure by matching multiple parties and by using other tools such as fitires to cover an exposed position until the book is complete.
Swap Market Participations
Since swaps are privately negotiated products, there is no restriction on who can use the market : however, parties with low credit quality have difficulty entering the market. This is due to fact that they cannot be matched with counter parties who are willing to take on their risks. In
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the U.S. many parties require their counter parties to have minimum assets of $ 10 million. This requirement has become a standardized representation of eligible swap participants .
The following list includes a Sample of Swaps Market Participants :
1. Multinational Companies.
Shell, IBM, Ronda, Unilever, Procter & Gamble, Pepsi Co.
2. Banks
Banks participate in the swap market either as an intermediary for two or more parties or as counter party for their own financial management.
3. Sovereign and public sector institutions
Japan, Republic of Italy, Electricity de France, Sallie Mae (U.S. Student Loan Marketing Association).
4. Super nationals
World Bank, European Investment Bank, Asian Development Bank.
5. Money Managers
Insurance companies, Pension funds.

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Secondary Factors in the Development of the Swap Market
As international barriers to financial markets began to disappear, swap dealers were able to switch between different indexes and different markets. By arbitraging capital and credit markets, they were able to borrow at the best index available and then swap to the desired index.
Heavy borrowing by the US government and government agencies in the 80s played a major role in the development of the swap market. Borrowing at the floating rates and swapping to the fixed rates met the needs of the corporations and in effect added to the depth and the liquidity of the swap market.
Taking a view on the future direction of the interest rates, swaps can be proved to very attractive instruments, and under a variety of yield curve conditions, they are among the cheapest to transact. Speculative trading of the swaps added enormously to the depth and liquidity of the market.
Foreign Exchange Swap
Swaps are derivatives that involve a private agreement between two parties to exchange cash flows in the future according to a prearranged formula. The underlying instruments are liabilities or assets with interest expenses or incomes. Swaps can be broadly classified into two types Interest Rate Swaps and Currency Swaps. The first recorded swaps were negotiated in 1981. Since then, the markets have grown very rapidly.
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A basic foreign exchange swap is the simultaneous purchase and sale of one currency for another, where the two contracts have different dates (different positions of same or different amount on different dates).
Cash Management Swap
It is used to realize efficient cash management or to adjust the maturity dates of existing forward contracts.
Handling Surplus and Deficit Cash Positions
The international scope of business conducted by financial and nonfinancial organization will often require the management of cash flows in more than one currency. From time to time, an entity will find itself with surplus cash balance in one currency and deficit balances in another currency.
Swapping Forward Contracts Forward at Historical Rates.
Corporations often face considerable uncertainty in timing and /of amount when forecasting currency cash flows. Forward contracts that were dealt to hedge such flows may mature on a date that does not match the actual cash flow. In such cases, the maturity of the original
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forward contract crates cash flows for which there is no immediate offset.
Once again, the cash manager can borrow to fund the deficit, invest the surplus, or execute a cash management swap. Another method to deal with this type of situation is to swap contracts at historical rates. The new forward contract consists of the maturing forward rate adjusted by the current points and a working capital interest factor.
Historical rate rollovers have the same basic economic as market rate saps. The also eliminate the need for any cash settlements on the original maturity date and avoid the accounting problems frequently associated with the FX gain/loss account. On small forward contractrs, the actual dollar amount of the net settlement ma be small, and cost of settling may be excessive given the amount involved. In other cases, an entity may not have the cash to settle on the swap but still want the swap done.
As a general comment, usage of historical rate swaps varies from market to market, but this type of swap is not a heavily traded transaction. One of the major reasons is its susceptibility to abuse.
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There are basically two types of swap transactions :
Interest Rate Swap Currency Swap
1. INTEREST RATE SWAPS
The most common type of interest rate swaps are plain vanilla IRS. Here, one party A, agrees to pay to the other party B, cash flows equal to interest at a predetermined fixed rate on a notional principal for a number ofyears. Simultaneously, A agrees to pay party B cash flows equal to interest at a floating rate on the same notional principal for the same period of time. The currencies of the two sets of interest cash flows are the same. Moreover, only the difference in the interest
payments is paid/received; the principal is used only to calculate the interest amounts and is never exchanged.
It is an arrangement whereby one party exchanges one set of interest payment for another e.g. fixed or floating.
An exchange between two parties of interest obligations (payment of interest) in the same currency on an agreed amount of notional principal for an agreed period of time.
Example :
Two counter parties are involved in a swap agreement, corporate A and corporate B and a dealer arranges the swap (taking a spread).
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Amount to be borrowed : USD 100 Mn. For 15 years. Following are the rates at which A and B can raise funds :
Fixed
Floating
Corporate A Corporate B
5% 7%
6M LIBOR + 50bp 6M LIBOR + 100bp
It can be observed that Corporate A has advantage in borrowing in both fixed and floating market. (Fixed market 2 % and Floating market 50bp).
However, by swapping interest rate obligation both A and B can borrow at lower rates.
Corporate A borrows fixed @ 5 %
Corporate B borrows floating @ 6 month LIBOR + 100bp.
By entering into a swap agreement : A will become floating ratepayer; and B will become fixed rate player.
Cash flow under the swap agreement;
Corporate A
PAY 6 M LIBOR*
RECEIVE 5% 145
5%&
-----
Net cost: 6 M LIBOR (Pay 5 % cancels Receive 5 %)
Corporate B PAY 5.5 %* 6 M LIBOR + 100bp & RECEIVE 6 M LIBOR * -----
Net Cost : 6.5 %
PAY/RECEIVE TO/FROM DEALER & PAY TO THE LENDER IN CASH MARKET
NOTE:
1. Corporate have to borrow in cash market and meet their obligations. 2. It is assumed that the dealer takes a spread of 50bp.
Corporate A achieves floating rate at 6 M LIBOR better by 50bp than without swap. Corporate B achieves fixed rate at 6.5 % better by 50bp than without swap. Dealer makes 50bp.
Types of IRS
We have discussed the plain vanilla swaps till now. These swaps can be subdivided into swaps made directly between two parties or with an
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exchange. Moreover, they can be classified on the basis of the floating reference rate used, which may be LIBOR, CP rate, T-Bill rate, etc. Apart from plain vanilla IRS discussed above, there are several other types of swaps.
Basis Swaps:
Where both the legs are floating interest rates.
Amortizing Swaps:
Where the principal reduces in a predetermined way to correspond to the amortization schedule on a loan.
Step-up Swaps:
Where principal increases in a predetermined way
Deferred/Forward Swaps:
Where parties do not begin to exchange interest payments until some future date.
Combinations with currency Swaps:
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where fixed rate in one currency is exchanged with floating rate in another currency.
Extendable Swaps:
Where one party has the option to extend the life of the swap beyond the specified period.
Put table Swaps:
where one party has the option to terminate the swap early.
Swaptions :
which is options on swaps.
Constant Maturity Swaps (CMSs):
Where LIBOR is used as reference rate.
Constant Maturity Treasury Swaps (CMTs):
Where LIBOR is exchanged for a particular Treasury rate.
Indexed principal Swaps:
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Where the principal reduces based on an index of interest rate levels.
Differential Swaps:
Where a floating rate in domestic currency is exchanged for a floating rate in foreign currency, with both interest rates applied on same domestic principal.
Back valued Swaps:
Where past effective dates are used.
Prepaid Swaps:
where the fixed leg payer pays his obligations in advance, and only receives payments till maturity, zero coupon swaps are exactly opposite to prepaid swaps, where the whole payment is given at the maturity.
Trends in Indian Markets
Before coming to the actual trends in the market, let us look at the players. Most of the active participation is by foreign banks, followed by Indian banks, Corporate and finally, FIs. The absence of nationalized banks from the Irs scene is noteworthy. Today, if a corporate wishes to enter an IRS deal, it will have to submit the following to its banker :
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Certified copy of the firms Memorandum and Articles of Associations. Board resolution authorizing derivative deals. An ISDA Master Agreement. Risk disclosure statement. Certificate wing underlying loan exposure. A certificate stating that IRS is for hedging risks, not for speculation.
Thus, we see that IRS today can be used by corporate only for an actual hedging exercise, and it has to have board permission. Moreover, the deal would be within the exposure limits of that firm for the bank with which it is dealing. These measures are to ensure that corporate do not undertake speculative activities, and start dealing only after they have proper risk management systems in place.
On the first day of trading, more than 30 deals were recorded, worth over Rs. 600 crores in notional principal terms. Rs. 500 crores of this was accounted for by corporate deals. The rush was because the European and private banks wanted to be a part of the history, dealing on first day, rather than actual hedging. It has also been reported that some deals were circular between three players, with no real effect in any players position. No deal was stuck for more than a years tenor.
Since the first day, there have been almost no deals, and the markets are cold. The reasons for this are many. At the short-term level, almost all the players expect the interest rates to go down in the next few months. This means that there are no conflicting views among players about interest rates, and so IRS deals are not very tempting. Again,
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there are very few floating rate loans around. These and other fundamental reasons have been discussed in the next secti9on.
In spite of these, there are many underlying reasons for going for IRS. Today, the major financial intermediaries viz. Indian banks, foreign banks, financial institutions, and corporate have radically different sets of asset-liability structures. Thus for ALM alone, IRS are a good options. For example, the FIs have much of their liabilities as bullet repayment bonds, and the bulk of their assets by way of installment repayment loans. Thus, chances are that their liabilities portfolio is longer than their assets portfolio. Commercial banks, on the other hand, have bulk of their liability portfolio in relatively short-term maturities, and assets are at longer maturities with fixed interest rates. Thus, banks and FIs alone can enter in a lot of mutually beneficial deals.
Corporate would also like to hedge their interest rate risks, and convert their fixed rate loans to floating rates, now that the options are available. However, their needs would be medium term in nature (2 to 8 years), and as yet there are no takers for this long maturities.
The market is only about 2 months old now, and is yet to evolve. The likely problem in its evolution and the future is discussed in the following sections.
FUTURE OUTLOOK FOR IRS IN INDIA
As India shifts from RBI controlled to market driven interest rate regime, volatility in the interest rate is bound to increase. This implies greater use of risk hedging mechanism like IRS. As the obstacles discussed in
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Section 5 are tackled, we shall see the evolution of the money market derivative markets. The speed of this evolution depends on how quickly the fundamental problems are addressed and the market revives. The major concern, of course, will be the emergence of a floating rate loan market, as at least one leg of the IRS has necessarily to be a floating rate. This is the single major reason why thee are no only many IRS deals, but also even no possibilities of deals ill the current scenario for corporate.
Then, we have seen that the stage is set for the financial institutions, commercial banks and corporate to enter into swaps as soon as they have risk management systems in place and the market matures. In the short run however, there will not be much activity as the fundamentals are unlikely to change quickly. A major concern is the govt. borrowing, which distorts the interest rates and has a major impact on the market. In a mature market, no player should be so big that it can affect the interest rates in a large way, causing rates, which do not really reflect the sentiments of the markets. On the other hand, this same point causes volatility in the markets, which is another reason to hedge against risks, where IRS comes in. We wait to see how the markets evolve.
Also likely in the medium term is the emergence of various types of swaps not currently allowed in India. Like IRS/FRAs kicked off the derivative market in India, swaptions may well kick off the options market in India, though today, it looks as though equity options will come up earlier. As awareness increases, and it dawns on the players that swaps are excellent hedging instruments, the market can only improve.
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Finally, we come to speculation. This is likely to stay away from Indian markets, at least for the corporate till a long time to come. REI, or the govt. does not encourage speculation in any other markets by the corporates or individuals. This is likely to continue, as
The current guidelines show. Moreover, for speculation, one needs volatility and diverse views, which are not present today. As these emerge, some players may be allowed to speculate, but the limits are likely to be strict and discouraging.
Overall, IRS is here to stay, and players will soon learn to use them effectively. Though in infancy now, the markets may evolve sooner than one may expect.
3. CURRENCY SWAPS
Each entity has a different access and different long term needs in the international markets. Companies receive more favorable credit ratings in their country of domicile that in the country in which they need to raise capital. Investors are likely to demand a lower return from a domestic company, which they are more familiar with than from a foreign company. In some cases a company may be unable to raise capital in a certain currency.
Currency swaps are also used to lower than risk of currency exposure or to change returns on investment into another, more favorable currency. Therefore, currency swaps are used to exchange assets or capital in one currency for another for the purpose of financial management.
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A currency swap transaction involves an exchange of a major currency against the U.S. dollar. In order to swap two other non-U.S. currencies, a dealer may need to arrange two separate swaps. Although, any currency can be used in swaps, many counter parties are unable to exchange of the principals takes place at the commencement and the termination of the swaps in addition to exchange of interest payments on agreed intervals. The exchange of principal and interest is necessary because counter parties may need to utilize the respective exchanged currencies.
The uses of currency swaps are summarized below:
Lowering funding cost Entering restricted capital markets Reducing currency risk Supply-demand imbalances in the markets
As for interest rate swaps, many variants of the plain vanilla currency swaps were created to meet some of the common financial management needs.
Amortizing currency swaps
The notional principals of these swaps are scheduled to decrease over the life of the swaps. Therefore, principals are exchanged accordingly.
Accreting currency swaps
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The notional principals of these swaps increase periodically. Principals are exchanged as scheduled.
Floating-for-floating rate currency swaps
As indicated by the name, this swap involves the exchange of a floating interest rate payment schedule in one currency against another floating interest rate payment schedule in another currency.
Features:
Converts a stream of payments (fixed or floating) in one currency into a stream of another currency. Usually involves an exchange of principal at the end of the term at an exchange rate agreed at the outset of the deal.
Following are risks associated with swaps :
Interest rate risk Exchange rate risk Default risk Sovereign risk Mismatch risk (for dealers only)
In 1987, a set of principal were arranged by the central banking authorities of the Group of Ten plus Luxembourg known as the Easle Supervisors Committee to standardize capital requirements across nations. According to this set of requirements, called the Easle Accord,
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dealers of swaps and other off balance sheet instruments are imposed risk-adjusted capital requirements.
CAPS & COLLARS
Caps are like insurance Protect against rise in rates of interest Benefits of falling rates available
Interest Rate Cap is agreement between a corporate and a bank borrower with floating rate debt. Under the terms of the agreement, the bank undertakes to bear extra cost on account of interest rate going up beyond the agreed rate during the agreed period. For this undertaking, the borrower pays premium.
This instrument caps the interest payment of the borrower as any rise above the cap will be borne by the bank which sells cap to the borrower.
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FLOORS
It is a hedging product for investors for protection against falls in interest rates. Interest Rate floors, when it protects against fall in interest rates, investors benefit from rising interest rates. Investor has to pay premium to the seller of Interest rate floor.
This instrument defines the floor i.e. the minimum rate of interest the investor would earn in case the interest rate falls beyond the agreed limit.
COLLARS
Where a corporate takes a view that the interest rate will remain in range, the corporate can combine cap and floor to achieve this objective. The corporate will buy Interest Rate Collar of between 7 % and 9 % if it believes that the interest rates would move between 7 % and 9 %. Corporate looses the benefit if rate falls below 7 %. However, as against this loss the corporate pays fewer premiums and is protected against the upside risk. (Of interest rates rising).
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4. FUTURES
In a futures contract there is an agreement to buy or sell a specified quantity of financial instrument in a designated Future month at a price agreed upon by the buyer and seller. A Future contract is evolved out of a forward contract and posses many of the same characteristics. In essence, they are like liquid forward contracts. Unlike forward contracts however, futures contracts trade on organized exchanges called futures markets. The characteristics of a future contract are Standardization The future contracts are standardized in terms of quantity and quality and future delivery date.
Margining The other characteristics of a futures contract is the margining process. The margin differs from exchange to exchange and may change as the exchanges perception of risk changes. This is known as the initial margin. In addition to this there is also daily variation margin and this process is known as marking to market.
Participants
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The majority of users are large corporations and financial institutions either as traders or hedgers.
Futures are exchange traded
1. In futures market there is availability of clearing house for settlement of transactions.
CURRENCY FUTURES
Currency futures markets were developed in response to the shift from fixed to flexible exchange rates in 1971. They became particularly popular after rates were allowed to float free in 1973, because of the resulting increased volatility in exchange rates.
A currency future is the price of a particular currency for settlement in a specified future date. A currency future contract is an agreement to buy or sell, on the future exchange, a standard quantity of foreign currency at a future date at the agreed price. The counterpart to futures contracts is the future exchange, which ensures that all contracts will honored. This effectively eliminates the credit risk to a very large extent.
Currency futures are traded on futures exchanges and the most popular exchange are the ones where the contracts are fungible or transferable freely. The Singapore International Monetary Exchange (SIMEX) and the International Monetary Market, Chicago (IMM) are the most popular futures exchanges. There are smaller futures exchanges in London, Sydney, Tokyo, Frankfurt, Paris, Brussels, Zurich, Milan, New York and Philadelphia.
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Pricing of Futures Contract
Futures Price = Spot Price + Cost of Carrying (Interest)
Cost of carrying is the sum of all costs incurred to carry till the maturity of the futures contract less any revenue, which may result in this period.
In India there is no futures market available for the Indian Corporates to hedge their currency risks through futures.
The advantages of Future Contract
Low Credit Risk : In case of futures the credit risk is low as the clearing house is the counter party to every futures. Gearing : Only small margin money is required to hedge large amounts.
The disadvantages of Future Contract
Basic Risk : As futures contract are standardized they do not provide a perfect hedge. Margining Process : The administration is difficult.
It is observed that a futures contract is a type of forward contract, but there are several characteristics that distinguish from forward contracts.
160
Standardized Vs. Customized Contract :
Forward contract is customized while the future is standardized.
Counter Party Risk :
In case of futures contract, once the trade is agreed upon the exchange becomes the counter party. Thus reducing the risk to almost nil. In case of forward contract, parties take the credit risk to each other.
Liquidity : Futures contract are much more liquid and their price is much more transparent as compared to forwards.
Squaring Off:
A forward contract can be reversed only with the same counter party with whom it was entered into. A futures contract can be reversed with any member of the exchange.
CONTRIBUTION OF DERIVATIVES IN THE GROWTH OF FOREX MARKETS.
The tremendous growth of the financial derivatives market and reports of major losses associated with derivative products have resulted in a great deal of confusion about these complex instruments. Are derivatives a cancerous growth that is slowly but surely destroying global financial markets ? Are people who use derivative products
161
irresponsible because they use financial derivatives as part of their overall risk management strategy ?
Thos who oppose financial derivatives fear a financial disaster of tremendous proportions a disaster that could paralyze the worlds financial markets and force governments to intervene to restore stability and prevent massive economic collapse, all at taxpayers expense. Critics believe that derivatives create risks that are uncontrollable and not well understood.
People have certain believes about derivatives which hampers the growth of the derivatives market. They are :
Derivatives are new, complex, high-tech financial products. Derivatives are purely speculative, highly leveraged instruments. The enormous size of the financial derivatives market dwarfs Bank Capital, Thereby Making Derivatives Trading an Unsafe and Unsound Banking Practice. Only large multinational corporations and large banks have a purpose for using derivatives. Financial derivatives are simply the latest risk management fad. Derivatives take money out of productive processes and never put anything back Only risk-seeking organizations should use derivatives The risks associated with financial derivatives are new and unknown Derivatives ink market participants more tightly together, thereby increasing systematic risks.
This is what some people believe, but its not the case.
162
Actually the financial derivatives have changed the face of finance by creating new ways to understand, measure, and manage financial risks. Ultimately, derivatives offer organizations the opportunity to break financial risks into smaller components and then to buy and sell those components to best meet specific risk-management objectives. Moreover, under a market-oriented philosophy, derivatives allow for the free trading of individual risk components, thereby improving market efficiency. Using financial derivatives should be considered a part of any businesss risk-management strategy to ensure that value-enhancing investment opportunities can be pursued.
Thus, financial derivatives should be considered for inclusion in any corporations risk-control arsenal. Derivatives allow for the efficient transfer of financial risks and can help to ensure that value-enhancing opportunities will not be ignored. Used properly, derivatives can reduce risks and increase returns.
Derivatives also have a dark side. It is important that derivatives players fully understand the complexity of financial derivatives contracts and the accompanying risks. Users should be certain that the proper safeguards are built into trading practices and that appropriate incentives are in place so that corporate traders do not take unnecessary risks.
The
use
of
financial
derivatives
should
be
integrated
into
an
organizations overall risk-management strategy and be in harmony with its broader corporate philosophy and objectives. There is no need to fear financial derivatives when they are used properly and with the firms corporate goals as guides.
163
THEORITICAL ASPECT OF THE STUDY
164
FORECASTING EXCHANGE RATES

EFFICIENT MARKET APPROACH
Financial markets are said to be efficient if the current asset prices fully reflect all the available and relevant information. The efficient market hypothesis(EMH), which is largely attributable to Professor Eugene Fama of the University of Chicago, has strong implications for forecasting. The exchange rate will then change only when the Market receives new information. Since news by definition is unpredictable, in the exchange rate will change randomly over time. If the exchange rate indeed follows a random walk, the future exchange rate is expected to be the same as the current exchange rate, that is,
St = E(St+1)
In a sense, the random walk hypothesis suggests that todays exchange rate is the best predictor of tomorrows exchange rate.
165
FUNDAMENTAL APPROACHS
The fundamental approach to exchange rate forecasting uses various models. For example, the monetary approach to exchange rate determination suggests that the exchange rate is determined by three independent variables : 1) relative money supplies 2) relative velocity fo monies, and 3) relative national output. One can thus formulate the monetary approach in the following empirical form.
S =
+ 1(m-m*) + 2(v-v*) + 3(y*-y) + u
Where, S = natural logarithm of the spot exchange rate. m-m* = natural logarithm of domestic/foreign money supply. v-v* = natural logarithm of domestic/foreign velocity of money. y*-y = natural logarithm of foreign/domestic output. U = random error term, with mean zero ,s = model parameters. Generating forecasting using the fundamental approach would involve three steps: Step 1 = Estimation of the structural model to determine the numerical values for the parameters such as and . Step 2 = Estimation of future values of the independent variable like (mm*), (v-v*) and (y*-y). Step 3 = Substituting the estimated values of the independent variables into the estimated structural model to generate the exchange rate forecasts.
166
TECHNICAL APPROACH
The technical approach first analyzes the past behavior of exchange rate for the purpose of identifying patterns and then projects them into the future to generate forecasts. Clearly, the technical approach is based on the premise that history repeats itself. The technical approach thus is at odds with the efficient market approach. At the same time, it differs from the fundamental approach in that it does not use the key economic variable such as money supplies or trade balances for the purpose of forecasting. However, technical analysts sometimes consider various transaction data like trading volume, outstanding interests, and bid-ask spreads to aid their analyses. While academic studies tend to discredit the validity of technical analysis, many traders depend on technical analyses for their trading strategies. If a trader knows that other traders use technical analysis, it can be rational for the trader to use technical analysis too. If enough traders use technical analysis, the predictions based on it can become self-fulfilling to some extent, at least in the short run.
167
Data analysis and interpretation
168
FUNDAMENTAL ANALYSIS OF INDO-US FOREIGN EXCHANGE RATE

Here we are analyzing about the Indo-US exchange rate for that the required data and in formations are as under
INDIA
(Amt. in Billion Rs.)
YEAR 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
GNP 14008.53 2 15031.15 5 16185.77 2 17077.37 3 18177.34 5 19239.77 9 20647.90 7 22363.87 5 24138.27 5 26886.39 3
VELOCITY 321.66 286.59 269.14 246.89 224.81 201.97 189 176.5 166.01 161.35
MONEY SUPPLY 4355.048 5244.862 6013.918 6916.923 8085.808 9526.208 10924.748 12670.767 14540.155 16663.455
169
2004 2005
30363.19 8 34570.31 8
144.83 132.83
20964.760 26025.210
170
UNITED STATE (US)

(Amt. in Billion Dollar)
YEAR 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
GNP 28288.9 29590.6 31267.3 33217.3 34987.6 370373.7 39267.9 40511.8 41878.4 43843 46743.7 49375.7
VELOCITY 655.95 6549 648.4 635.7 606.7 591.2 573.06 529.6 507.06 498.9 506.1 508.2
MONEY SUPPLY 4312.625 4518.283 4822.1 5224.766 5765.941 6270.308 6852.208 7648.492 8259.042 8787.325 9234.725 9786.467
171
FUNDAMENTAL MODEL FOR EXCHANGE RATE S = + 1(m-m*) + 2(v-v*) + 3(y*-y) + u
Where, S = natural logarithm of the spot exchange rate. m-m* = natural logarithm of domestic/foreign money supply. v-v* = natural logarithm of domestic/foreign velocity of money. y*-y = natural logarithm of foreign/domestic output. U = random error term, with mean zero ,s = model parameters. To obtain model parameters and we should have S = natural logarithm of the spot exchange rate. m-m* = natural logarithm of domestic/foreign money supply. v-v* = natural logarithm of domestic/foreign velocity of money. y*-y = natural logarithm of foreign/domestic output.
YEAR 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
S -3.446 -3.476 -3.570 -3.594 -3.722 -3.764 -3.804 -3.855 -3.884 -3.834 -3.812 -3.784
m-m* -0.0097 -0.149 -0.221 -0.281 -0.338 -0.418 -0.466 -0.504 -0.565 -0.639 -0.819 -0.978
v-v* 0.713 0.826 0.876 0.948 0.993 1.074 1.109 1.098 1.116 1.129 1.251 1.341
y*-y 0.702 0.677 0.658 0.665 0.654 0.655 0.643 0.594 0.551 0.488 0.431 0.363
Putting above data in model we can get followings equations
1994 1997
172
= -3.446 + 0.0097 1 -0.713 2 - 0.702 3 -0.033 = -0.139 1 + 0.113 2 - 0.025 3 -0.124 = -0.2113 1 + 0.163 2 - 0.044 3 -0.148 = -0.2713 1 + 0.235 2 - 0.037 3
Now, we have four equations and four unknowns. So, solving four ,1,2,3.
= -5.18 1 = -8.54 2 = -8.12 3 = 10.6
1998 2001
= -3.722 + 0.338 1 -0.993 2 - 0.654 3 -0.042 = -0.08 1 + 0.081 2 - 0.001 3 -0.085 = -0.128 1 + 0.116 2 - 0.011 3 -0.133 = -0.166 1 + 0.105 2 - 0.06 3
= -3.517 1 = -8.18 2 = -8.65 3 = 8.08
173
2002 - 2005
= -3.884 + 0.565 1 -1.116 2 - 0.551 3 -0.05 = -0.074 1 + 0.013 2 - 0.063 3 -0.072 = -0.254 1 + 0.135 2 - 0.120 3 -0.133 = -0.413 1 + 0.225 2 - 0.188 3
= -4.187 1 = -8.14 2 = -8.13 3 = 8.67
174
Model Parameters
YEAR 1
-8.54 -8.18 -8.14
2
-8.12 -8.65 -8.13
3
10.6 8.08 8.67
1994-97 -5.180 1998-01 -3.517 2002-05 -4.187
175
COMPARISON OF INDIAS GNP WITH EX.RATE

GP N
400 00 30 0 50 300 00 20 0 50 200 00 10 0 50 10 0 00 50 00 0 GP N
YE R A
E .R T X A E
6 0 5 0 4 0 3 0 2 0 1 0 0 E .R T X AE
YE R A
176
RESERCH FINDINGS & CONCLUSIONS
177
CONCLUSION
178
Bibliography
179
BOOKS
International Financial Management - Eun / Resnick
BULLETIN
Bulletin of rbi (Reserve Bank of India)
WEBSITES
www.economagic.com www.imf.com www.economicsurvey.com www.oanda.com www.rbi.org
SEARCH ENGINE
www.google.com www.yahoo.com
180

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LOAN AND ADVANCES SYSTEM

THE SMALL MANS BIG BANK RNSB

S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR

LOAN AND ADVANCES SYSTEM

THE SMALL MANS BIG BANK RNSB

Chapter 2 RESEARCH METHODOLOGY

Scope of the Study :

S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR

LOAN AND ADVANCES SYSTEM

THE SMALL MANS BIG BANK RNSB

S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR

LOAN AND ADVANCES SYSTEM

THE SMALL MANS BIG BANK RNSB

Limitation of the Project :

S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR

LOAN AND ADVANCES SYSTEM

THE SMALL MANS BIG BANK RNSB

Chapter 3 INDUSTRY PROFILE

S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR

LOAN AND ADVANCES SYSTEM

THE SMALL MANS BIG BANK RNSB

S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR

LOAN AND ADVANCES SYSTEM

THE SMALL MANS BIG BANK RNSB

RESERVE BANK OF INDIA

S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR

LOAN AND ADVANCES SYSTEM

THE SMALL MANS BIG BANK RNSB

STATE BANK OF INDIA & GROUP

OLD PRIVATE BANK

NEW PRIVATE BANKS

S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR

LOAN AND ADVANCES SYSTEM

THE SMALL MANS BIG BANK RNSB

REGIONAL RURAL BANKS

S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR

LOAN AND ADVANCES SYSTEM

THE SMALL MANS BIG BANK RNSB

DIFFERENCES BETWEEN COMMERCIAL BANKS AND CO-OPERATIVE BANKS

S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR

LOAN AND ADVANCES SYSTEM

THE SMALL MANS BIG BANK RNSB

S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR

LOAN AND ADVANCES SYSTEM

THE SMALL MANS BIG BANK RNSB

Central Bank and Monetary Authority Reserve Bank of India

Apex Banking Institutions

NATIONAL HOUSING BANK

Co-operative Banks State Cooperative Banks

Subsidiary Banks IFCI

Industrial Development Banks

State Level Land Development Banks Primary Land Development Bank

S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR

LOAN AND ADVANCES SYSTEM

THE SMALL MANS BIG BANK RNSB

Chapter 4 COMPANY PORFILE

S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR

LOAN AND ADVANCES SYSTEM

THE SMALL MANS BIG BANK RNSB

S. K. Patel Institute of Management and Computer Studies, GANDHINAGAR

LOAN AND ADVANCES SYSTEM

THE SMALL MANS BIG BANK RNSB