CORRESPONDENT BANKING Caiib

Correspondent Banking
It is a relationship between two banks which have mutual accounts with
each other:
Nostro accounts “ Our account with you “
E.g. SBI Mumbai maintaining USD account with City Bank, New York
Vostro accounts “Your account with us”
E.g.. City Bank New York maintains Rupee account with SBI Ludhiana.
Loro account“His account with them”
E.g. City bank referring to Rupee account of Bank of America with SBI
Mumbai.
Mirror account---- It is replica ofNostro account to reconcile.
What is Swift?
Society for Worldwide Interbank Financial Telecommunications. There are
8300 members of the society. Financial messages are sent through Swift.
The messages are automatically authenticated through BKE (Bilateral Key
Exchange). It is operational 24 hours and 365 days. Swift has now
introduced new system of authentication system wherein banks are
required to have authentication key exchanged between them through a set
format by use of RMA (Relationship Management Application). This is
called BIC or Bank Identifier Code).
CHIPS – New York
Clearing House Inter Bank Payment System.
CHIPS is major payment system in USA with 48 members. The participants
use the system throughout the day for sending and receiving electronic
payment instructions. These are netted at end of the day and net position is
debited or credited to Nostro account of Federal Reserve.
It is used for Foreign Exchange Inter bank settlements and Euro Dollar
Settlements.
FEDWIRE -USA
It is US payment system being operated by Federal Reserve Bank. It
handles majority of domestic payments. All US banks maintain account with
Federal Reserve Bank and are allotted ABA numbers to identify senders
and receivers of payments.
CHAPS – London
Clearing House Automated Payment System
It is UK based Settlement System. It handles receipts and Payments in UK.
It has 16 member banks and 400 Indirect members.
TARGET
The full form of TARGET is Trans-European Automated Real-Time Gross
Settlement Express Transfer System. It is Euro Payment System which
comprises of 15 national RTGS systems working in EUROPE. It process
high value payments from 30000 participating institutions across Europe.
RTGS-plus
RTGS plus has over 60 participants. It is a German Hybrid clearing system
and operating as a European oriented RTGS and Payment system.
RTGS & NEFT in India
Real Time Gross Settlement is a payment system for Interbank transfer

with minimum Rs. 2.00 lac. This system is managed by IDRBT, Hyderabad,
which connects all banks to Central server maintained by RBI. The network
is INFINET (Indian Financial Network)
Timings are:
8:00AM to 8:00PM (Saturday: 8:00 to 3:30 PM)
NEFT (National Electronic Fund Transfer) is mainly used for low amount
transactions. However, there is no minimum and maximum limit. The
timings are: 8:00AM to 7:00PM (Saturday 8:00 to 1:00 PM). There are 12
batches daily except Saturday with 6 batches. The time period is B+2.
Who is Resident
Indian? Who is
Non- Resident
A person who resides in India for more than 182 days during preceding
financial year is Resident Indian. A person who is not resident is Non-
Resident.
Who is NRI? A person who is citizen of India but resides outside India owing to:
 Employment, Business, vocation-------indicating indefinite period of
stay outside.
 Work abroad on assignment with Foreign Govt., UNO, and IMF etc.
 Deputation officially.
 Study abroad.
PIO - Persons of
Indian Origin
PIO is a person who is citizen of any other country, but he at any time:
 Held Indian Passport
 He or his grand-parents or grand grand parents were Indian citizens
by virtue of constitution of India or under Indian Citizenship Act.
 The person is spouse of Indian Citizen.
OCB – Overseas
Corporate
Bodies
OCBs are firms, Cos, Society owned directly or indirectly to the extent of atleast
60% by NRIs.
It also includes overseas trusts where at-least 60% irrevocable beneficial
interest is held by non-residents directly or indirectly.
NRE Deposit
Accounts
Only non-resident Indians can open following NRE accounts with banks:
 Fixed Deposits & Recurring Deposits
 SB and CA Deposits
The other features are:
 Deposits are held in Indian currency.
 The Principal and Interest both can be repatriated.
 Account holder bears the risk of fluctuations in currency rates.
 Account will be opened with proceeds from abroad.
 Funds originating in India cannot be deposited.
 Interest rates Have since been deregulated by RBI..
 No lien is permitted to be marked against SB deposits.
 Joint account with Indians can be opened as Former or
Survivor.
 Cheque book and IBS allowed.
 Nomination in favor of NRI/Resident Indian allowed.
 Interest Income is exempt from Income Tax, Gift Tax or Wealth Tax.
 TOD allowed up to Rs. 50000/- for maximum 2 weeks.
 Account can be operated in India through mandate also.
 Loans against FDR to 3rd parties allowed provided NRI is personally
present for documentation.




FCNR- B
accounts
FCNRB accounts can also be opened by NRIs. The conditions of NRE
deposits as explained above are also applicable on FCNR-B deposits with
the following additional features:
 Only FD 1-5 years tenure can be opened.
 The amount is kept in Foreign Currency and repaid in the Foreign
Currency.
 6 currencies i.e. GBP, USD, Euro, JPY, CAD. AUD are eligible
currencies for opening the account.
 No exchange risk for the customer. The bank bears the risk.
 Interest on the basis of 360 days in a year
 Half yearly intervals of 180 days
 Interest exemptions from I.T.
 Operating by P/A not permitted.
 The amount of Principle and Interest is freely repatriable
 Interest Rate on 1-3 years FD is LIBOR + 200 bps and that of 3-5
years FD is LIBOR + 400 bps.(Previously, it was LIBOR + 300 bps)
Rupee Loans
against
NRE/FCNRB
FDRs
Demand Loan or Overdraft is allowed against FDR. There is no maximum
limitof loan against pledge of FDR (Which was100 lac earlier). The loan
can be availed for :
 Personal purpose.
 Investment.
 Purchase of property.
The loan can be repaid :
 From proceeds of abroad
 From NRE/FCNR account
 From local resources through NRO account.
NRO accounts Non-Resident accounts can be opened:
 By any person resident outside India (other than a person resident
in Nepal and Bhutan) can open NRO account, maintain it for 6M
and can convert it into foreign currency after completion of stay
provided no local funds are credited to the account.
 Deposit may be held jointly with residents
 Currency of Deposit is Indian Rupees
 Not Repatriable except for the following in the account - 1) Current
income 2) Up-to USD 1 Million per financial year.
 Type of Deposit may be Savings, Current, Recurring, Fixed Deposit.
 Existing accounts of residents are converted to NRO category
consequent upon their becoming NRIs.
 TDS called withholding Tax is applicable at 30% + Service Tax
+Education Cess.
 Prior permission of RBI is required to open NRO account of
Pakistani national. However permission is not required for
opening NRO account of Bangladeshi citizen.
Resident
Accounts –
Operation Either
or Survivor with
non- resident
It has been decided that AD banks may include an NRI close relative
(relatives as defined in Section 6 of the Companies Act, 1956) in existing /
new resident bank accounts as joint holder with the resident account holder
on “Either or Survivor” basis subject to the following conditions:

 Such account will be treated as resident bank account
 Cheques, instruments, remittances, cash, card belonging to the NRI
close relative shall not be eligible for credit to this account
 The NRI close relative shall operate such account only for and on
behalf of the resident for domestic payment
Where due to any eventuality, the non-resident account holder becomes
the survivor, it shall be categorized as NRO account
Investments by
NRIs in India
NRIs are allowed to invest in India on Repatriation basis as well as on Non-
Repatriation basis. NRI can purchase Equity Shares, Preference shares
and Convertible Debentures in Indian companies subject to conditions
under following categories:
1. Foreign Direct Investments.
2. Portfolio Investment
3. Purchase and Sale of Shares on Non-Repatriation basis.
4. Purchase of other securities of Indian Companies.
5. Exchange Traded Derivatives.
Besides above, NRIs are permitted to invest in:
 Units of UTI and Mutual Funds
 Company Deposits – Minimum 3 years‟ period.
 Share in Proprietorship firm/partnership firm provided the firm is not
engaged in Agriculture and Plantation activity or Property business.
 Acquiring of Immovable property not being Agriculture, Plantation or
Farm House.
NRI can acquire IP by way of :
 Purchase out of funds received in India
 By way of gift from resident in India or outside India.
 By way of Inheritance from a person resident outside India.
The Income from the property or sale proceeds of the property can be
repatriated outside India up to monetary limit of USD1 Million per financial
year provided all the applicable taxes are paid.
NRIs can invest in Govt. securities, treasury bills on non- repatriation
basis. However, NRI cannot invest in Small saving Schemes including
PPF.
Loans to NRIs NRI can avail the following loans:
1. Rupee Loans in India
- Up to up to any limit subject to prescribed margin.
- For personal purpose, contribution to Capital in Indian
Companies or for acquisition of property.
- Repayment of loan will be either from inward remittances or
from local resources through NRO accounts.
2. Foreign Currency Loans in India
- Against security of funds in FCNR-B deposits.
- Maturity of loan should not exceed due date of deposits.
- Repayment from Fresh remittances or from maturity proceeds of
deposits.
3. Loans to 3rd Parties provided
- There is no direct or indirect consideration for NRE depositor
agreeing to pledge his FD.
- Margin, rate of Interest and Purpose of loan shall be as per RBI
guidelines.


- The loan will be utilized for personal purpose or business
purpose and not for re-lending or carrying out
Agriculture/Plantation/Real estate activities.
- Loan documents will be executed personally by the depositor
and Power of attorney is not allowed.
4. Housing Loans to NRIs : HL can be sanctioned to NRIs subject to
following conditions:
- Quantum of loan, Margin and period of Repayment shall be
same as applicable to Indian resident.
- The loan shall not be credited to NRE/FCNR account of the
customer.
- EM of IP is must and lien on assets.
- Repayment from remittance abroad or by debit to NRE/FCNR
account or from rental income derived from property.
Portfolio
Investment
Scheme for NRIs
RBI has permitted NRIs to invest in PIS subject to following conditions:
 Investment on repatriation as well as non-repatriation basis.
 Purchase/Sale of shares and debentures
 Through Regd. Brokers
 Amount is routed through designated branch.
 Only delivery based transactions
 Investment on Repatriation basis can be made out of inward
remittances or out of NRE/FCNR deposits.
 Investment on Non-Repatriation basis can be made out of NRO
deposits besides NRE/FCNR deposits.
Ceiling PER Investor
5% of paid up capital of Indian Company or 5% of Value of each issue of
convertible debentures.
Ceiling PER Investor Company
10% of paid up capital of Indian Company or 10% of Value of each issue of
convertible debentures.