Global Financial Markets and International Banking: Trends, Instruments and Trade Finance for RBI Grade B Finance
Last updated: 2026-11-13 · MockMentor
"Global financial markets and International Banking: broad trends and latest developments" is a line of the General Topics unit in the RBI Grade B Phase 2 Finance syllabus. It overlaps with the chapter on the global financial system, which covers crises and reforms, but this chapter focuses on how banks work across borders: the instruments of trade finance, correspondent banking, external borrowing, offshore centres and the standard setters of global banking. Questions often test terms such as nostro and vostro accounts, letters of credit, Masala bonds and ECBs.
In one line: international banking covers deposits, loans, payments and trade finance across borders; it runs on correspondent accounts, SWIFT messages and letters of credit, and India takes part through Indian banks abroad, foreign banks in India, external commercial borrowings and the banking units in GIFT City.
Basic concepts
- International banking: banking services provided across national borders or in foreign currencies, including cross-border lending, deposits, payments and trade finance.
- Offshore banking: banking with non-residents in a jurisdiction, often in foreign currency, under lighter rules and taxes than the domestic market, such as in an International Financial Services Centre.
- Eurocurrency: a deposit in a currency held outside its home country, such as US dollars in a London bank (Eurodollars). The term has nothing to do with the euro.
- Correspondent banking: an arrangement in which one bank (the correspondent) provides services such as payments and collections for another bank (the respondent), usually in another country.
- External Commercial Borrowing (ECB): a loan raised by an Indian entity from a non-resident lender, in foreign currency or rupees, under RBI rules.
- Trade finance: financing and risk management for exports and imports, such as letters of credit, guarantees and export credit.
Why in News?
- RBI allowed authorised dealer banks in India to lend in rupees to non-residents in Bhutan, Nepal and Sri Lanka for cross-border trade from 2025, as part of steps to internationalise the rupee.
- RBI proposed in 2025 to revise the external commercial borrowing framework, linking borrowing limits more to a borrower's financial strength and widening the set of eligible borrowers and lenders.
- India's mutual evaluation by the Financial Action Task Force (FATF), adopted in June 2024, placed India in the "regular follow-up" category, the best outcome, which helps Indian banks in their correspondent relationships.
- The share of the US dollar in global foreign exchange trading stayed close to 90% in the Bank for International Settlements' 2025 triennial survey, while daily turnover rose above US$ 9 trillion.
Global financial markets: broad trends
| Market | Trend |
|---|---|
| Foreign exchange | The largest market, with daily turnover above US$ 9 trillion; London, New York, Singapore and Hong Kong dominate |
| Global bond market | Over US$ 130 trillion outstanding, led by government bonds of the United States, Japan and Europe |
| Global equity market | Market value of over US$ 100 trillion; the United States accounts for more than half |
| Derivatives | Notional OTC derivatives of several hundred trillion dollars, mostly interest rate contracts |
| Private credit and private equity | Fast growth as banks pull back from riskier lending |
| Digital assets | Crypto assets and stablecoins growing, with increasing regulation |
Key trends include the rise of passive investing, the growing role of non-bank financial institutions, the move from LIBOR to risk-free rates, shorter settlement cycles, rising public debt and the effects of geopolitics, sanctions and trade fragmentation on capital flows.
Forms of international banking
| Form | Description |
|---|---|
| Correspondent relationship | A bank uses foreign banks to make payments and collect money abroad without its own presence |
| Representative office | A small office that promotes business and gathers information but cannot do banking |
| Branch | A part of the parent bank abroad, using the parent's capital |
| Subsidiary | A separately incorporated bank abroad, owned by the parent, with its own capital and local licence |
| Offshore banking unit | A unit in a special zone that deals mainly with non-residents in foreign currency |
| Joint venture | A bank owned jointly with a local partner |
Indian banks abroad and foreign banks in India
Indian banks, led by SBI and Bank of Baroda, have branches, subsidiaries and representative offices in many countries, serving the Indian diaspora, Indian companies and trade. Foreign banks operate in India either through branches or through a wholly owned subsidiary (WOS). RBI's framework of 2013 encourages a WOS for systemically important foreign banks and treats a WOS almost like a domestic bank, with near national treatment. SBM Bank (India) and DBS Bank India are examples. Foreign banks must meet the same priority sector target of 40% if they have 20 or more branches.
Correspondent banking and payment messaging
Nostro, vostro and loro
| Account | Meaning (from the Indian bank's view) |
|---|---|
| Nostro ("our account with you") | An account an Indian bank holds with a foreign bank, in foreign currency, such as SBI's dollar account with a New York bank |
| Vostro ("your account with us") | An account a foreign bank holds with an Indian bank, in rupees |
| Loro ("their account with you") | A third bank's account with a correspondent, referred to by another bank |
| Mirror account | A record an Indian bank keeps of its nostro balance, to reconcile entries |
Special Rupee Vostro Accounts (SRVAs), allowed by RBI since July 2022, let banks of partner countries open rupee accounts with Indian banks to settle trade in rupees. Balances can be invested in Indian government securities.
SWIFT
The Society for Worldwide Interbank Financial Telecommunication (SWIFT), founded in 1973 and based in Belgium, is a secure messaging network used by over 11,000 institutions in more than 200 countries to send payment instructions. It does not move money itself; banks settle through their correspondent accounts. The global move to the ISO 20022 messaging standard, which carries richer data, was completed for cross-border payments in November 2025. After some Russian banks were removed from SWIFT in 2022, countries began building alternatives such as Russia's SPFS and China's CIPS. India's Structured Financial Messaging System (SFMS), run by IFTAS, handles domestic interbank messages.
Cross-border payments roadmap
The G20 endorsed a roadmap in 2020 to make cross-border payments faster, cheaper, more transparent and more inclusive by 2027, with targets such as an average cost of remittances of no more than 3%. India's efforts include linking UPI with other fast payment systems and joining Project Nexus of the BIS.
Trade finance
Letters of credit
A letter of credit (LC) is an undertaking by a bank (the issuing bank), on behalf of a buyer (the applicant), to pay a seller (the beneficiary) if the seller presents documents that meet the terms of the LC. It replaces the buyer's credit risk with the bank's.
| Type | Feature |
|---|---|
| Revocable and irrevocable | An irrevocable LC cannot be changed without the consent of all parties; under UCP 600, all LCs are irrevocable |
| Confirmed | A second bank, usually in the seller's country, adds its own promise to pay |
| Sight and usance | Payment on presentation of documents, or after a set period |
| Revolving | Renews automatically for repeated shipments |
| Back-to-back | A second LC issued on the strength of a first, used by intermediaries |
| Transferable | The beneficiary can transfer it to a supplier |
| Red clause and green clause | Allow advance payment to the seller before shipment, without (red) or with (green) warehousing |
| Standby LC | Works as a guarantee: paid only if the applicant fails to perform |
LCs are governed by the Uniform Customs and Practice for Documentary Credits (UCP 600) of the International Chamber of Commerce (ICC). Trade terms such as FOB (Free on Board) and CIF (Cost, Insurance and Freight) come from the ICC's Incoterms rules, the latest version being Incoterms 2020.
Other trade finance instruments
| Instrument | Meaning |
|---|---|
| Bank guarantee | A promise by a bank to pay if its customer fails to meet an obligation, such as a performance guarantee |
| Pre-shipment credit (packing credit) | A loan to an exporter to buy raw materials and produce goods before shipment |
| Post-shipment credit | Finance after shipment, until the buyer pays, through purchase or discounting of export bills |
| Buyer's credit | A loan from a foreign bank to an Indian importer to pay for imports |
| Supplier's credit | Credit given by the overseas exporter to the Indian importer, often backed by its bank |
| Factoring | Sale of receivables to a factor for immediate cash; may be with or without recourse |
| Forfaiting | Purchase of medium- to long-term export receivables without recourse to the exporter, usually backed by bank guarantees or LCs |
| Export credit insurance | Cover against non-payment by foreign buyers, offered by the Export Credit Guarantee Corporation of India (ECGC) |
RBI's interest equalisation scheme, run by the government, gave exporters an interest subsidy on pre-shipment and post-shipment rupee credit for several years.
External borrowing by Indian entities
External Commercial Borrowings
ECBs are commercial loans from recognised non-resident lenders, such as foreign banks, multilateral institutions, foreign equity holders and export credit agencies. RBI's framework sets:
- Eligible borrowers: companies, LLPs, NBFCs and others eligible for FDI.
- Recognised lenders: residents of FATF-compliant countries.
- Minimum average maturity: generally three years, with exceptions.
- An all-in-cost ceiling over a benchmark rate.
- End-use restrictions: ECBs cannot be used for real estate, investment in capital markets or on-lending for these, with some exceptions.
- Automatic and approval routes, with a limit per borrower per year under the automatic route.
Other routes
| Instrument | Feature |
|---|---|
| Foreign Currency Convertible Bonds (FCCBs) | Bonds issued abroad in foreign currency that can be converted into shares |
| Foreign Currency Exchangeable Bonds | Bonds convertible into shares of another company in the same group |
| Masala bonds | Rupee-denominated bonds issued abroad; the investor bears the currency risk; first issued by the International Finance Corporation in 2014 and by Indian firms such as HDFC and NTPC from 2016 |
| Trade credits | Credit from overseas suppliers or banks for imports, regulated by RBI |
| Depository receipts | ADRs and GDRs issued abroad on Indian shares |
ECBs and trade credits add to India's external debt, which RBI and the government track closely. India's external debt is moderate as a share of GDP, and short-term debt is a small part of it.
International Financial Services Centres
GIFT City in Gandhinagar is India's first IFSC. Banks can open IFSC Banking Units (IBUs) there, which deal mainly in foreign currency with non-residents and with residents under FEMA rules. IBUs are regulated by IFSCA. Activities include:
- Foreign currency loans to Indian and foreign companies.
- Trade finance and aircraft and ship leasing.
- Bullion trading through the India International Bullion Exchange.
- Fund management and derivatives such as GIFT Nifty.
- Offshore rupee derivatives, so that trading moves from Singapore and Dubai to India.
The aim is to bring back financial services that Indian firms now buy abroad.
Standard setters and international bodies
| Body | Role |
|---|---|
| Bank for International Settlements (BIS), 1930, Basel | Bank for central banks; hosts the BCBS and other committees; research on global finance |
| Basel Committee on Banking Supervision (BCBS), 1974 | Global standards for bank capital, liquidity and supervision |
| Financial Stability Board (FSB), 2009 | Coordinates financial regulation among G20 countries |
| International Monetary Fund (IMF), 1944 | Surveillance, lending to countries in crisis, SDRs |
| World Bank Group | Development finance; includes the International Finance Corporation, which lends to private firms |
| Financial Action Task Force (FATF), 1989 | Standards against money laundering and terrorist financing; India became a member in 2010 |
| International Organization of Securities Commissions (IOSCO) | Standards for securities regulators, of which SEBI is a member |
| International Association of Insurance Supervisors (IAIS) | Standards for insurance supervisors |
Risks in international banking
| Risk | Example |
|---|---|
| Country and sovereign risk | A government blocks payments or defaults |
| Transfer risk | Capital controls prevent conversion of currency |
| Exchange rate risk | Losses from currency movements |
| Correspondent banking risk | Withdrawal of correspondent services ("de-risking") from countries seen as high risk |
| Money laundering and sanctions risk | Penalties for handling funds linked to crime or sanctioned parties |
| Legal and regulatory risk | Different laws in different countries |
| Contagion | Problems in a global bank spreading across borders |
Challenges for India
- Indian banks are small by global standards and have a limited presence in major financial centres.
- Dependence on the US dollar and on correspondent banks abroad.
- Sanctions and geopolitical risk affecting trade payments.
- Competition from Singapore and Dubai as offshore centres.
- The need for long-term foreign funding for infrastructure without excessive currency risk.
Way forward
- Grow GIFT IFSC through tax stability, deeper markets and a supportive legal framework.
- Expand rupee trade settlement and UPI links to lower dependence on the dollar.
- Encourage large Indian banks to build a global presence where Indian trade and investment are growing.
- Keep ECB rules prudent, with incentives to hedge currency risk.
- Maintain strong anti-money laundering standards to keep correspondent relationships secure.
Possible exam and interview questions
- What is correspondent banking? Explain nostro and vostro accounts and the role of SWIFT in international payments. (620 words)
- Explain the types of letters of credit and how they reduce risk in international trade. (420 words)
- What are Masala bonds? Why are they called a tool of rupee internationalisation?
- Distinguish between factoring and forfaiting.
- Interview: Can GIFT City become a global financial centre like Singapore?
Related reading: global financial system, foreign exchange market, and international economic institutions.
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