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International Banking
by Hargovind Sachdev, Ex GM, State Bank of India & Head of Central European Credit Desk of SBI, Frankfurt, Germany.

Banking has been an integral part of life. As empires expanded, the concept of ‘Collection Centres’ evolved to collect taxes and distribute wealth. Coins of precious gold and silver were issued. The temples were the earliest banks as the same were headed by Priests, whom king and the commoner trusted alike as embodiment of honesty, integrity, trust and truthfulness. Lack of steel safes and residential security forced people to keep coins in the temple basements. At the instructions of coin owners, the priests started circulating coins to the needy people on loan and collected back with interest in the shape of large numbers of coins. This saga of operations through a third party trust gave birth to banking. 

Sea Voyager, Vasco-da-gama travelled across oceans in 1497 to discover the Golden Bird India in search of muslin, jewels and natural resources. In the process he linked India with Europe. Around the same period in 1495, Columbus also sailed across ferocious seas to discover India. He ultimately ended up discovering America and linked Europe with the Americas. Both Vasco-da-gama and Columbus laid the foundation of international trade which actually flourished due to the support of an underlying fair and transparent financial give and take system, presently called International Banking. 


Earliest international trading was conducted in coins. If a Greek coin held more gold than an Egyptian coin due to size and weight, the merchant traded in a way that left him with more Greek coins. Most of the earlier transactions were either barter or bilateral with buying countries opening accounts of sellers in their country and putting payable amounts in the account. The seller used the funds for buying goods and taking them to his country. International Trade and International Banking are two sides of the same coin. One can not exist without the other. 


Morning we get up and clean our teeth without noticing that the bristles of the tooth brush are made up of petroleum products imported from the Gulf. While doing morning Pooja, we light the agarbatti containing imported fragrance. We eat bread with imported pulses and drive down in a car having an imported gear box running on Saudi Arabian oil. We sit in an air-conditioned office cooled by imported condensers and use Google Meet and WhatsApp also brought in from abroad to speak around the world. In a way each one of us uses imported products round the clock but still fails to realise that all that we enjoy is available through international trade facilitated by international banking, which has become an intimate part of life. 


All bankers have to hone skills to assimilate the nuances of international trade at both micro and macro level to serve society and nation in right earnest. Banking Quest is endeavouring to empower bankers with fundamental knowledge about international banking.


The first international forex market was shaped in 1945 at the city of Bretton Wood in the US where all currencies were linked to the US dollar and all countries were advised to compulsorily maintain adequate gold in their central banks to buy back their currency. This system was misused for hoarding gold by most countries resulting in escalation of its price. In 1971, after a virtual defeat in the Vietnam war , the USA closed down the linkage of gold with currency. Each country was advised to conceptualise a Monetary Policy and implement the same through fiscal discipline. 


Forex is now the biggest market in the world as countries buy big from each other on an hour to hour basis and international banking is leveraged to settle the transactions in various currencies. The currency risk has become the biggest risk of our time due to its direct impact on inflation affecting quality of life.


Post Independence India also linked its currency to USD and maintained Gold reserves but since 1972 a Liberalised Exchange Rate Management system has been implemented. However due to poor infrastructure and inadequate quality standards, Indian exports did not take off, whereas imports of oil and gold impacted the balance of payment adversely affecting the value of Rupee. Our currency is not convertible to the Capital Account but only to the current account.


A lot of emphasis is given by the government through special expert institutions to encourage foreign trade especially exports to strengthen our currency. An Act called FEMA has been enacted to manage forex transactions with clarity. An empowered body named DGFT has been established to encourage commerce and monitor balance of payment positions on a day to day basis. Reserve Bank of India itself intervenes in the market to sustain the value of Rupee through active sale and purchase of Dollars. An expert body of bankers has formed FEDAI to settle interbank forex disputes and frame guidelines for forex business. To alleviate the fear of exporters, ECGC has been formed to guarantee and insure exports. On an international level, ICC continues to facilitate free flow of capital worldwide by formulating International business rules, like UCPDC and INCOTERMS.


As a result of sustained efforts, giant banks have emerged across continents lending billions of dollars as loans to enhance infrastructure and trade. Suitable mitigation mechanisms for safety of bank assets have been brought in, like the Basel Accords, which enjoin supervisory followup and maintenance of capital adequacy against all the three risks of Credit, Market and Operations.


International banking is the true banking as it brings sea change in the lives of countrymen. Each banker should cultivate the expertise in foreign exchange as first love to be a lubricant for growth of the society. 


Rightly said, “Banking establishments are like the international army, they criss cross borders many times a day, spreading happiness to bring prosperity in play.”



Mr. Hargovind Sachdev has over 39 years of banking experience having occupied senior positions in UCO Bank, United Bank of India, State Bank of Patiala, State Bank of Travancore & State Bank of India where he headed the Central European Credit Desk at Frankfurt, Germany from 2006 to 2011 covering 15 countries of Central Europe.

This article is based upon the lecture delivered by Mr Hargovind Sachdev in Banking Quest' Foreign Exchange Training Program on July 17. 2021