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FEDAI Rules-13, Abolition of Sterling Rates Schedule.


Introduction
Basis for calculation of merchant rates for all currencies :
PURCHASE
SALE
PART II
General
Accounting Procedures for Import and Export Bill Transactions
Export Bills Purchased/Negotiated/Discounted

Chapter 13

Abolition of sterling Rates Schedule, Delinking of Interest Element from Exchange Rates and Accounting Procedures for Import and Export Transactions (AR Circular No. 3/86 dated 7th June 1986)

  1. Introduction

    In implementation of the instructions issued by the Reserve Bank of India for abolition of Sterling Rates. Schedule etc., vide A.D. (M.A.Series) Circular No. 21 of 1st November 1983, FEDAI has issued these Guidelines to member banks. Instructions relating to maximum spread between TT purchase and sale rates for merchant transactions in Pound Sterling will be issued by the Reserve Bank at the appropriate time i.e. before 1st January 1984 and member banks are, therefore, requested to read the instructions contained herein in conjuction with future directives of the Reserve Bank. As already emphasized in the aforesaid circular of Reserve Bank , member banks should ensure, that the Guidelines prepared by the FEDAI are strictly followed by the branches of member banks while handling merchant transactions.

    Few examples have been worked out and given in Annexures IV and V to the Guidelines not included) in order to assist members banks to train their staff in adopting the new system of exchange rate quotations that will come into operation with effect from 1st January 1984. The examples given are not necessarily exhaustive. Member banks are, therefore, requested to conduct trial exercises themselves in order to prepare their internal procedures for implementation of the new system.

    The Guidelines comprise of 3 parts:
    1. Basis for calculation of merchant rates for all currencies.
    2. Segregation of interest element from exchange rates for bill purchase transactions and calculation of interest on export bills,etc.
    3.  Accounting procedures for import and export bill transactions including delinking of the relative foreign currency amounts from currency positions.

      PART I
  2. Basis for calculation of merchant rates for all currencies :
    2.1 The merchant rate quotations will be derived by each Authorised Dealer from the ‘BASE RATES’
    ‘BASE RATES’ to be applied for arriving at Merchant purchase and sale rates shall be derived from the ongoing Spot Market Rates for each of the currencies. In arriving at Merchant spot TT sale and purchase rates derived from the ‘BASE RATES’, each Authorised Dealer shall ensure that the maximum spread between the two TT rates shall be within the range prescribed by the RBI from time to time.

    The “Base Rate” may be worked out daily by individual banks
    Name of currency Maximum spreads between customer rates for ready Clean TT business from the mean TT rate (taking Both sides together) Current Revised
      Max Spreads
    Max Spreads
    U.K.Pound Sterling 0.75% 2.00%
    U.S. Doller 1.00% 1.00%
    Deutsche Marks 2.50% 2.00%
    Japanese Yen 2.50% 2.00%
    French Francs 2.50% 2.00%
    Swiss Francs 2.50% 2.00%
    Dutch Guilders 2.50% 2.00%
    Australian Dollars 2.50% 2.00%
    Other currencies No limit for No limit the present, for The but Ads present, shall keep but Ads the rate shall keep spreads the Rate to the spreads minimum, to the
    Authorised Dealers will, however, be free to quote rates to customers which are better than those warranted by the spread limits.

    2.2 Exchange margins have been made flexible and Authorised Dealers may offer rates to customers depending upon the business, etc. The following exchange margins on the base rates have been prescribed :-
    Transaction  Exchange Margin
    1. TT purchase 0.025% to 0.080%
    2. Bills purchase 0.125% to 0.150%
    3. TT sale 0.125% to 0.150%
    4. Bills sale over the Merchant TT rate 0.175% to 0.200%

    Transaction                Exchange Margin
    1. TT purchase         0.025% to 0.080%
    2. Bills purchase     0.125% to 0.150%
    3. TT sale                 0.125% to 0.150%
    4. Bills sale over the 0.175% to 0.200%
    Merchant TT rate
  3. For calculation of merchant rates Authorised Dealers shall apply the following procedure :

    PURCHASE

    3.1 Merchant Spot T.T. Purchase Rate
    i. Arrive at the BASE RATE
    ii. To the above BASE RATE add the appropriate exchange margin.

    3.2 Merchant Spot Bill Buying Rate
    i. Arrive at the BASE RATE
    ii. To the above BASE RATE add the appropriate exchange margin.
    a. Add/deduct on-going forward discount/premium depending upon the transit period of the bill such as sight, usance and grace period, etc.
    b. Add appropriate exchange margin.

    3.3 Merchant Forward T.T. Buying Rate
    i. Arrived at the BASE RATE
    ii. To the above BASE RATE
    a. Add/deduct on-going forward discount/premium depending upon the delivery period of the bill.
    b. Add appropriate exchange margin.

    3.4 Merchant Forward Bill Buying Rate
    i. Arrive at the BASE RATE
    ii. To the above BASE RATE
    a. Add/deduct on-going forward discount/premium depending upon the delivery period of the bill, transit period, tenor of the bill such as sight, usance and grace period, etc.

    3.5 “The Merchant Purchase Rates so arrived shall not be worse than those derived from the RBI buying rates in respect of currencies in which the RBI provides spot and forward cover.”

    3.6 Recovery of interest on bill transactions at the time of purchase :
    The Rupee equivalent of the foreign currency bill amount shall be payable to the customer on the basis of the Rate arrived at as above. Simultaneously, interest shall be recovered on the Rupee amount, from the customer by applying the appropriate interest factor as stated in the table attached vide Annexure 1. (Annexure not attached since factor varies as and when rates of interest are changed by Reserve Bank of India).

    3.7 Purchase of Rupee Bills
    In the case of Rupee bill purchases the entire bill amount shall be first payable to the customer. Simultaneously interest shall be recovered on the Rupee amount from the customer by applying the appropriate interest factor.
  4. SALE

    4.1 Merchant Spot TT Sale Rate :
    i. Arrive at the BASE RATE
    ii. From the above BASE RATE deduct appropriate exchange margin.

    4.2 Merchant Spot Bill Sale Rate
    From the merchant TT Sale rate as determined above, deduct appropriate exchange margin.

    4.3 Spot Merchant Sale Rates for TT and Bill Transactions shall not be worse for the customer than those derived from RBI’s Spot Selling Rate for Pound Sterling as the basis.

    4.4 Merchant Forward Sale Rate
    For quoting Merchant Forward Sale Rates’ for import TT/Bill transactions, Authorised Dealers shall base their quotations on the appropriate cover rate from which appropriate exchange margins for TT and /or Bills as mentioned above shall be deducted.

    PART II
  5. Delinking of Interest Element from the Exchange Rates for Bill Purchase Transations

    5.1 To fall in line with the international practice, Authorised Dealers shall effective from 1st January, 1984, quote rates for export bills on the basis of on-going market rates . The exchange margins are to be loaded in the rate, quoted to the customer. Interest for the entire notional transit period, usance, grace period (where applicable) shall be recovered simultaneously at the time of purchasing, discounting or negotiating the bill by applying the appropriate interest factor on the Rupee amount of the bill.
    The procedure to be followed shall be as under :-
    1.  Arrive at the Rupee equivalent of the foreign currency amount at the appropriate buying rate.
    2. Credit the Rupee amount to the customer’s account.
    3. Simultaneously recover the interest amount and credit it to “Interest on Export Bills Account.”
    4. Overdue interest, where applicable, shall be recovered separately.

      Note :
      In case of payment to a party, not being a customer of the payee bank, only the net amount shall be payable. Full details of the interest and other deductions shall be
      Advised.
  6. General

    6.1 The spreads between Spot T.T. Sale and Spot T.T. Purchase rates for all currencies shall be in compliance with RBI directives issued from time to time.

    6.2 Rounding off the rates will be as per FEDAI Rule 4 (III) (d) vide Annexure III. (Since amended as per our Circular AR No.1/88 dated 21st November 1988).

    6.3 All Authorised Dealers shall keep a record of :-
    a. The BASE RATES for the purpose of arriving at the merchant rates, and
    b. Any changes made in the BASE RATES during the day. Such record shall be made available for audit.

    6.4 The time of executing all merchant transactions shall be recorded so as to establish the application of the correct prevalent rates.

    6.5 All Authorised Dealers shall correctly apply the forward/usance margins and exchange margins before quoting merchant rates,etc.

    6.6 In case of forward contracts for export bills, the contract rate shall be worked out without loading interest factor and interest for the period (transit,usance,grace)shall be recovered at the time of negotiation/purchase/discount. The recovery of interest at the time of purchase/discount/negotiation shall not be lost sight of.
  7. Accounting Procedures for Import and Export Bill Transactions

    7.1 To bring uniformity in the handling of import bills under letters of credit and export bills purchased/negotiated/discounted, Authorised Dealers shall follow the procedure given below:-

    7.2 Import Bills
    i. Sight Import Bills received under letters of credit and conforming to credit terms, may be held in foreign currency for a maximum period of 10 days from the date of receipt of document by the bank.
    ii. In case of non-payment by the drawee within 10 days as above, the importer’s liability on the foreign currency bill shall be crystallized by converting the foreign currency amount into Rupees at the B.C. Selling Rate prevailing on the 10th day or the Forward Exchange Contract Rate where applicable.
    iii. Authorised Dealers shall keep a proper record of the date of receipt of documents.

    7.3 The Authorised Dealers shall keep a proper changes in their L/C agreement/ applications to give effect to the above.

    7.4 In case the 10th day is a holiday or a Saturday, the importer’s liability in Rupees shall crystallise on the next following working day.

    7.5 Authorised Dealers shall carry swap costs upto the 10th day on their own account and shall not recover such costs from the customer.

    7.6 Authorised Dealers shall charge interest at the rate as prescribed by RBI for advances to non-priority sectors from time to time one Rupee advances made against the import bills pending retirement by the customer. Such interest shall be recovered from the date of negotiation to the date of crystallization of the Rupee liability and thereafter penal interest shall be recovered. (Applicable rates of interest amended as per our Circular Misc No. 11/90 dated 21st May 1990).

    7.7 If the date when the Rupee liability on an import bill is crystallized at the Forward Exchange Contract Rate results in early/late delivery under a Forward Exchange Contract, the charges as per FEDAI Rule 9 (Refer to revised Rule 8) shall be levied.

    7.8 Authorised Dealers shall charge commission/handling charges at the rate of 0.15% on the bill amount at the time of converting foreign currency into Indian Rupees irrespective of the fact whether the bill is retired within 10 days or later. (Also refer to para x.c. of the revised Rules)

    7.9 All import bills under Letters of Credit shall be reported as ‘SALES’ when the Rupee liability is crystallized.
  8. Export Bills Purchased/Negotiated/Discounted

    8.1 Foreign currency bills when purchased/negotiated/discounted shall be at the
    Authorised Dealers’ bill buying rate on that day or at the contracted rate. Interest for the transit,usance,grace period where applicable shall be recovered simultaneously. (Also refer to our Special Circulars No. 2643/NTP/SPL-18/86 dated 27th May 1988).

    8.2 For bills remaining unpaid for a period of 30 days after the transit period in case of demand bills and the due date in case of usance bills, the foreign currency amount shall be reversed from the “export bills purchased portfolio” on the 30th day by the Authorised Dealer. In case 30th day happens to be holiday, or Saturday, it shall be reversed on the next following working day. The rate applicable to such reversal shall be the ready TT selling rate of exchange on that day and shall be reported as ‘Notional Sale’ of foreign currency. The Rupee equivalent of the foreign currency thus reversed, shall be held in the advances portfolio of the bank under the head “Advances against overdue export bills realizable account”.
    The unpaid bill shall be treated as outstanding under the sanctioned limit of the customer in a separate folio with the exchange risk open against the customer. Interest for the overdue period shall be recovered at the appropriate rate upto the date of realization of the bill. Appropriate rate of interest shall mean the maximum rate of interest permissible by Reserve Bank of India for overdue export bills or (Since amended as per our Circular Misc. No. 11/90 dated 21st May 1990) the penal rate if the bill amount was recovered in Rupees from the customer due to dishonour thereof by the drawee.

    8.3 As and when the bill is realized and advice of realization either by cable or by mail is received, the Authorised Dealers shall apply the TT buying rate on that day and adjust the advances created in their books against the bill as explained above. Any shortfall/excess shall be recovered from/paid to the customer. Authorised Dealers shall report the ‘PURCHASE’ of foreign currency.

    8.4 Authorised Dealers shall not charge or pay any swap cost for the period of 30 days i.e. the period between the relevant due date and the transfer of the item to advance portfolio as explained in 8.2 above.

    8.5 In the case of highly volatile currencies, it is up to the Authorised Dealer to negotiate the bill at the risk and responsibility of the customer.

    8.6 For the purpose of reporting the reversals of bills purchased earlier (paragraph 8.2) in the relative R-Returns, Authorised Dealers may be guided by the instructions issued by the Reserve Bank of India from time to time.

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