Ever wondered how the Reserve Bank of India ensures that the Indian economy remains balanced and has adequate money flow?&nbsp;

Among numerous financial tools <a href="https://www.skydo.com/blog/ensure-rbi-guidelines-for-cross-border-transactions-with-skydo?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">RBI</a> uses, one of the most important is the Cash Reserve Ratio (CRR). CRR is a monetary policy to regulate the amount of money banks must keep as reserves with the RBI to ensure they have enough liquidity.&nbsp;

In this blog, you will learn what the CRR is about—its objectives, how it works, who sets it, and why it changes regularly.&nbsp;

The Reserve Bank of India wants Indian Banks to have enough funds to lend and still have funds to meet the withdrawal requirements of customers. Hence, the RBI created the Cash Reserve Ratio (CRR) for banks to take a percentage of their total deposits and reserve the funds with the RBI.&nbsp;

By adjusting the CRR, RBI can control the amount of money banks have available for lending and control economic factors such as inflation.

In cases of inflation or when there is excess money flow in the market, the RBI regulates the CRR to ensure that the demand and supply are balanced. Currently, the RBI requires <a href="https://www.skydo.com/blog/the-impact-of-open-banking?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Indian banks</a> to maintain a cash balance of no less than 4.5% of the Net Demand and Time Liabilities (NDTL).

NDTL is the total demand and time liabilities (Deposits) held by Indian banks. It includes the cash balance held by the banks with other banks and the general public's deposits (Cash, FDs, etc.) in the bank’s various accounts. For example, an Indian bank with Rs 200 crore NDTL must maintain 9 crores as cash reserves.&nbsp;

Banks calculate their CRR based on a specified percentage of their net demand and time liabilities. Banks must maintain the prescribed CRR on a daily average. They may hold these reserves as cash in their vaults or as deposits with the central bank.

The Reserve Bank of India holds the cash reserve ratio account, and the bank transfers or withdraws the required account from this account to maintain the minimum cash reserves. Banks regularly report their reserve holdings to the central bank, and the latter may conduct audits or inspections to ensure adherence. 

An Indian bank’s core operation is lending money to individuals and corporations at an interest rate. Although the interest rate fluctuates regularly, it can not go lower than a base rate. The base rate sets the benchmark for the minimum rate at which a bank can lend funds. Once the RBI sets the base rate concerning the CRR, it provides transparency to individuals and corporations as to the minimum borrowing and lending rates.&nbsp;

Apart from being an important reference point for setting the base rate, the Cash Reserve Ratio also fulfils these objectives in the financial market.

When the RBI increases the CRR, the banks have fewer funds to lend. Lower funds force the banks to increase the lending interest rate, resulting in borrowers paying more as interest. Since they pay more, the RBI reduces the excess money flow or liquidity in the market.&nbsp;

On the other hand, when the central bank decreases the CRR, banks have more funds available for lending. In turn, they decrease the lending interest rates, allowing various entities to take loans by spending lower amounts on repayment. With higher disposable income left to individuals, they have more to spend, increasing the market's money supply.&nbsp;

Furthermore, higher interest rates resulting from an increased CRR may attract foreign capital, leading to an appreciation of the national currency against currencies such as USD. Conversely, a decrease in CRR and lower interest rates might lead to a depreciation of the national currency as investors seek higher returns elsewhere.&nbsp;

The change in CRR by the RBI is based on the lending operations of the Indian banks, which is the core factor for them to make profits. The higher the lending, the higher the profits for banks. However, rapid lending can result in banks having a low cash reserve, and an unexpected rush by bank account holders to withdraw their cash can lead to banks defaulting to meet the withdrawal requests.&nbsp;

Hence, the RBI ensures that it regularly maintains and adjusts the Cash Reserve Ratio (CRR) to let banks maintain a minimum liquid amount for such a scenario. The main motive behind changing CRR regularly is to ensure that the banks have enough funds to create a healthy balance between lending and meeting the withdrawal requirements of customers.&nbsp;

Furthermore, Central banks use adjustments in the CRR as part of their broader monetary policy framework to create an economic balance. For example, if there is inflationary pressure, the central bank might raise the CRR to reduce the money supply and curb inflation. Conversely, during economic downturns, the central bank might lower the CRR to stimulate economic activity by increasing the availability of funds for lending.

CRR serves as a mechanism for controlling the money supply, influencing interest rates, and contributing to the broader economic stability of a nation. Furthermore, it ensures that the customers can withdraw their funds at any time with the guarantee that the bank will be able to meet the withdrawal requirements.&nbsp;

Apart from using the CRR, the RBI uses metrics such as repo and reverse repo rates to regulate the money supply.&nbsp;

Another factor is the Statutory Liquidity Ratio (SLR), which is similar to the CRR but differs in assets to be held as reserves. In SLR, the banks are required to maintain a certain percentage of their Net Demand and Time Liabilities (NDTL) in the form of liquid assets. Here, liquid assets can include government securities, approved bonds, and other high-quality, low-risk securities.

Understanding CRR is important to understand the monetary policies RBI uses to regulate the economic equilibrium and ensure that the money supply is always balanced.&nbsp;

Q1. What is the formula for the Cash Reserve Ratio?

Ans: The CRR is calculated as the percentage of a specific bank's Net Demand and Time Liabilities (NDTL). The formula for CRR is as follows:&nbsp;

CRR = Reserve Requirement / Bank Deposits x 100%&nbsp;

Ans: The current <a href="https://www.bankbazaar.com/finance-tools/emi-calculator/current-rbi-bank-interest-rates.html#:~:text=The%20Cash%20Reserve%20Ratio%20(CRR,currently%20remains%20unchanged%20at%204.50%25.">CRR </a>in India set by the RBI is 4.5% of the Net Demand and Time Liabilities (NDTL).&nbsp;

Q3. What are repo and reverse repo rates?&nbsp;

Ans: The Repo Rate is the interest rate at which RBI lends money to commercial banks. It is currently 6.50%. The reverse repo rate is the interest rate at which the RBI borrows money from commercial banks. It is currently 3.35%.&nbsp;

Q4. What is liquidity or Cash Reserve Ratio?

Ans: It is a monetary policy tool used by RBI to regulate the liquidity in the financial system and control the money supply. CRR is a specified percentage (currently 4.5%) of a bank's total deposits that must be held in the form of cash reserves or as deposits with the RBI.

What is Cash Reserve Ratio (CRR) In India Th

large_What is Cash Reserve Ratio (CRR) In India Th

medium_What is Cash Reserve Ratio (CRR) In India Th

small_What is Cash Reserve Ratio (CRR) In India Th

thumbnail_What is Cash Reserve Ratio (CRR) In India Th

SEPA is a payment format that allows the transfer of Euro-denominated funds within the SEPA region, with 36 member countries.

SEPA first began operations in January 2008 and is regulated by the European Payment Council (EPC). At first, SEPA only processed credit transfers, but it was updated in November 2009 to include direct debits and debit cards.&nbsp;

As an Indian freelancer or business owner, collaborating with clients in the EU and understanding the intricacies of the SEPA transfers, with its key features and benefits, is important. This blog will help you unravel the significance of SEPA transactions and explore how this initiative is reshaping the landscape of European electronic payments

SEPA global transactions within the member EU countries allow the following four payment processing schemes.

The processing and settlement times for SEPA transactions vary depending on the nature of the transaction. Here are the processing times for SEPA payments based on the four types of payment processing schemes:&nbsp;

For businesses registered in the US that are processing SEPA Direct Debit payments from customers for bank accounts in the SEPA area, the settlement time for the SEPA international payments is 3-6 days.&nbsp;

Although the requirements for SEPA vary for each bank, here are some common details needed:

The SEPA network is a domestic payment system for the member EU countries, similar to payment methods ACH in the US, BACs in the UK and NEFT in India, requiring two bank accounts to complete the transaction.&nbsp;

Every account in the SEPA area is assigned an International Bank Account Number (IBAN) at inception. The IBAN is the European equivalent of an Indian bank account number. When making a SEPA transfer, the parties have to quote the IBAN identification codes.&nbsp;

SEPA’s standardized payments system allows the direct debit of a Euro-denominated bank account within the SEPA region.&nbsp;

Almost all SEPA transactions are free as it is the nationalized payment method for EU member countries. If you are a small business owner or a freelancer registered in India but have clients in the member EU countries, SEPA can be a convenient and cost-effective way for your clients to pay you.&nbsp;

However, as India is not a member country of the SEPA, it becomes challenging for a small business owner or freelancer in India to accept payment made through the SEPA. The only way for an Indian entity to accept SEPA payments is through a licensed third-party payment platform. Platforms like <a href="https://www.skydo.com/">Skydo</a> provide a one-stop solution to efficiently accept Euro payments from international clients through a virtual SEPA account. Using <a href="https://www.skydo.com/">Skydo</a>, you don’t have to open a traditional SEPA bank account in the SEPA Region and can virtually receive Euro SEPA payments. Once received, you can transfer funds from your virtual SEPA account to your Indian bank account after converting the funds into INR.&nbsp;

In its essence, <a href="https://www.skydo.com/">Skydo</a> presents an effective and accessible solution for domestic and international entities to embrace the benefits of SEPA payments and ensure a seamless payment process, as it is easier for clients to use the SEPA network.&nbsp;

The SEPA network and its associated transactions represent a significant leap forward in European electronic payments. Establishing the Single Euro Payments Area has harmonised the diverse payment landscapes across participating countries and laid the foundation for a more efficient, secure, and seamless cross-border payment ecosystem.

Adopting common formats, such as IBANs, streamlines the identification and processing of transactions, reducing errors and enhancing overall transaction efficiency. Furthermore, options such as SEPA Instant Credit Transfer provide the facility for instant fund transfer in case of urgency with the same level of security.&nbsp;

For Indian entities, platforms like <a href="https://www.skydo.com/">Skydo</a> are helping streamline global transactions through SEPA. You can open your virtual SEPA account by visiting the <a href="https://www.skydo.com/">Skydo</a> website.&nbsp;

Q1. Do I need a European bank account to receive SEPA payments?&nbsp;

Ans: Yes, if you want to receive the funds directly into your bank account, you would need a European bank account. However, you can use third-party payment platforms such as Skydo to open a SEPA account virtually, receive funds in the virtual account, and transfer the funds to your Indian bank account.&nbsp;

Ans: No, SEPA and SWIFT are different. SEPA standardises euro payments within Europe, while SWIFT enables international payments beyond SEPA, using BIC codes instead of IBANs. While they can work together, they serve distinct purposes.

Ans: Yes, IBAN is mandatory for all SEPA payments denominated in euros. It ensures accurate routing within the Single Euro Payments Area.

What are SEPA Transfers? - Everything You Need To Know Th

large_What are SEPA Transfers? - Everything You Need To Know Th

medium_What are SEPA Transfers? - Everything You Need To Know Th

small_What are SEPA Transfers? - Everything You Need To Know Th

thumbnail_What are SEPA Transfers? - Everything You Need To Know Th

The W-8BEN form is filled out by non-US residents or business entities earning an income from the US. The major benefit of filling out a W-8BEN tax form is that you avail tax benefits and exemptions in the USA despite being a non-resident. In short, this is a tax-saving form and can help you reduce your taxes significantly, especially if your country has entered a tax treaty with the US.&nbsp;

The complex nature of tax norms in the US makes compliance difficult. In this article, we will go through the basics of the W-8BEN tax form, why it is important, how it can benefit you, and the consequences of not filling it.

The W-8BEN form is issued by the Internal Revenue Service (IRS). The agency <a href="https://www.youtube.com/watch?v=rFZVwEUHRqg">mandates</a> that all non-US resident individuals and entities earning an income in the United States fill out this form to avail of tax exemptions. Without the W-8BEN tax form, an entity must pay tax according to the USA’s standard 30% tax rate.

The W-8BEN tax form establishes the foreign status of individuals, whereas businesses, corporations, partnerships, and other entities must use the W-8BENE form to avail their tax exemptions.&nbsp;

According to the IRS, individuals or businesses earning income in the following ways are also required to fill the W-8BEN form:

This means non-US citizens or businesses that engage in investments, work with other businesses or partnerships in the US, own property in the US, etc., are generally the type of entities that fill this form.&nbsp;

To know whether you fall under this category, you must ask yourself two simple questions:

If your answer to both is yes, chances are you will need to fill out the W-8BEN tax form.&nbsp;

Failure to fill out the form can result in the US government withholding 30% of your income or any amount credited to you.&nbsp;

Some entities/individuals who may be required to submit the W-8BEN form are:

Students who receive any income from compensatory fellowships or scholarships are exempt. These individuals must fill out a different set of forms according to the <a href="https://www.sec.gov/Archives/edgar/data/1084544/000119312506201838/dex99a1vii.htm#:~:text=No%20Form%20W%2D8BEN%20is,that%20apply%20to%20that%20income.">guidelines</a> laid down by the IRS.

The W-8BEN tax form is a straightforward form that most people fill out themselves. Here is what the form looks like:

Section 1: Identification of Beneficial Owner

This section includes basic information about you, such as your name, country of citizenship, country of residence, date of birth, permanent residence, and mailing address.&nbsp;

This section has a field to enter your US Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). If you are not a US citizen, you will not be eligible for an SSN; in that case, you must apply for an ITIN. It takes about 4-6 weeks to get the ITIN after filling out the W-7 form with the IRS.

The next field is the foreign tax identifying number (FTIN). This is an important field, and if your country does not provide a foreign tax ID, you can also enter your passport number.&nbsp;

While you can check a box if the FTIN is not applicable, it is not generally recommended to do so since it can result in discrepancies cropping up in your form. The reference number field can be left blank.

This depends on your country of residence since the withholding amount depends on the country’s treatment with the US. You can try looking up your country’s treaty on the IRS website and entering the withholding amount accordingly.&nbsp;

The treaty is generally in the form of a PDF and contains withholding rates for different types of income. This section also requires you to enter the specific article and paragraph from the treaty that mentions the withholding amount for the type of income you are earning.&nbsp;

The final section includes a certification that ensures you understand the conditions of the form, followed by your date of birth, signature, and name.

It is best to get help from an agent, but if you are used to filling out this form, you should get it right. Another mistake commonly made is leaving the ITIN field blank.&nbsp;

Do not submit your form to the IRS directly. In most cases, the person who pays you the money or income you earn will ask you to submit the W-8BEN tax form. Download the form (more on that below) and submit it to them. Another option is going through a withholding agent who will receive your form after you fill it out and submit it.&nbsp;&nbsp;

You must submit the form whenever it is asked of you, even if you do not intend to file for exemption from taxes for that particular time period.

Go to the IRS’ official website and <a href="https://www.irs.gov/pub/irs-pdf/fw8ben.pdf">download the latest revision of the W-8BEN form</a>. Do not rely on third-party sites claiming to have the latest versions. The IRS website shall give you the right version.

If you submit an expired or outdated form, you may have to go through the process again and resubmit it.

What is the Difference Between a W-8BEN and a W-8BEN-E Form?

There are two forms: W-8 BEN and W-8 BEN-E form. The W-8BEN form is for individuals, and the W-8 BEN-E is meant to be filled by entities other than individuals, such as businesses and partnerships.

While the former is a short, one-page form, the latter extends to 8 pages. The W-8BEN-E requires additional details about your entity type, the Foreign Account Tax Compliance Act (FATCA) status, exempt retirement plans, and additional certifications.&nbsp;

There are five types of W-8 forms, including W-8 BEN and W-8BEN-E. Here are some basic requirements they fulfill:

Best practices to follow when filling a W-8BEN form

The best way to ensure you comply with all the rules and regulations is to go through an agent. Agents can also be useful to ensure that your forms are submitted and handled without any complications or errors.&nbsp;

However, it is absolutely your decision if you want to go solo and do it yourself. You can also be updated with all the changes by subscribing to financial newsletters or following tax consultants on LinkedIn who regularly simplify the field and its intricacies for their viewers.&nbsp;

To sum up, doing business globally or out of your country as a foreign entity is tough enough, and figuring out your tax liabilities and responsibilities can seem daunting. But if you do it right, it can save you a fortune, which is why going through this grueling process is worth it.&nbsp;

Whether it is the W-8BEN or W-8BEN-E, it is important to recognize what type of entity you are and what other types of forms you need to fill out to get this one right. Kindly refer to the <a href="https://www.sec.gov/Archives/edgar/data/1065088/000119312509098031/dex99a1viii.htm">instructions on the SEC website</a> for more guidance.

Q1. Do I need to submit a new W-8BEN form for each payment or transaction?

Ans: An individual W-8BEN form is required for each withholding agent, not each transaction or payment. If you have multiple sources of income, you should file a different form with each of them.&nbsp;

Q2. Can a tax professional help me fill out the W-8BEN form?

Ans: Yes, there are several professional agencies and freelance agents that you can contact to help you fill out your form and submit it. Most people who have been filling out the W-8BEN form for years end up doing it alone, but it is recommended you go through a professional initially.

Ans: A W-8BEN form is valid from the date the form is signed to the last day of the next three calendar years. However, any changes in the conditions mentioned in the form that can deem it incorrect make it invalid.

Q4. Can I submit a W-8BEN form electronically?

Ans: Yes, you can submit the form via email after filling in the details and scanning it.

Everything You Need to Know About the W-8BEN Form Th

large_Everything You Need to Know About the W-8BEN Form Th

medium_Everything You Need to Know About the W-8BEN Form Th

small_Everything You Need to Know About the W-8BEN Form Th

thumbnail_Everything You Need to Know About the W-8BEN Form Th

Anyonya Sahayakari Mandali Co-operative Bank, the first one in India, was established in 1889 with 23 members and INR 73 to save Baroda’s residents from exploitation by moneylenders.

True to its name, cooperative banking is a small financial institution that operates on the principles of cooperation, mutual assistance, and shared ownership among the members. Group members commonly start cooperative banking to cater to the capital needs of a specific community. The members own, operate, and are responsible for all the activities executed through the cooperative banks, and the board members are democratically elected to manage operations.&nbsp;

The main motive behind establishing such institutions was to address the problem of rural or local credit and cater to the capital needs of artisans, farmers, daily wage laborers, and anyone with limited means. The Indian government amended the Cooperatives Societies Act in 1912 to include organizations to audit and supervise the supply of cooperative credit. These organizations were:&nbsp;

Currently, 31 cooperative banks in India are under the direct supervision of the RBI and are required to adhere to the regulations as per the Banking Regulation Act 1949 and Banking Laws Act 1955.&nbsp;

Cooperative banks differ from traditional commercial banks’ ownership structure, governance, and primary objectives.&nbsp;

Operation and Services of Cooperative Banks&nbsp;

Cooperative banks strive to provide all the basic banking services a traditional bank provides but at a much more affordable rate.&nbsp;

Cooperative banks generally focus on the low-income segments. Here are some of the major advantages of cooperating banks and their financial services:&nbsp;

Challenges faced by Cooperative banks&nbsp;

Their size, vision, and operations create many challenges for cooperative banks in India:&nbsp;

Cooperative banks in India have the potential to scale and offer improved financial services to a large customer base. The current era of digital services demands integrating their banking services with new-age fintech companies to offer seamless and quick online transactions, which is currently limited The growth of cooperative banks depends on promoting financial literacy about the bank’s products, services, principles, and economic development initiatives to their members.

Cooperative banks may strengthen their cooperation and collaboration with other cooperative financial institutions at regional, national, and international levels to ensure better services, data security and customer privacy.&nbsp;

Cooperative banks are an integral part of the Indian banking ecosystem as they focus on providing banking and financial services to underserved communities. They provide most of the banking services as traditional banks but ensure the offerings at a much lower cost, promoting much-needed financial inclusion.

These banks will continue evolving and adapting to changing market dynamics and member needs as time passes. By embracing technology, fostering innovation, and staying true to their cooperative principles, they can remain competitive, financially stable, and socially responsible while continuing to serve their communities and members effectively.

Q1. What is meant by the cooperative bank?

Ans: A cooperative bank is a financial institution owned and controlled by its depositors, who are also its members. They prioritize serving their members' needs over maximizing profit, fostering a community-oriented approach to banking.

Ans: Yes, cooperative banks in India are regulated by the Reserve Bank of India (RBI) under the Banking Regulation Act 1949. They adhere to the same regulations and supervision as other commercial banks.

Q3. How many types of cooperative banks are there?

Ans: There are two main types in India:

Additionally, there are specialized cooperative banks catering to specific sectors like industry or professions.

Cooperative Banking: Meaning, Structure & Advantages Th

large_Cooperative Banking: Meaning, Structure & Advantages Th

medium_Cooperative Banking: Meaning, Structure & Advantages Th

small_Cooperative Banking: Meaning, Structure & Advantages Th

thumbnail_Cooperative Banking: Meaning, Structure & Advantages Th

An exchange rate is the rate or value at which one currency can be exchanged for another. When a layman tries to exchange their currency from dollars to rupees, they might go to a bank or sign up through an online intermediary. If you have tried to exchange your current currency from a bank, you might have noticed that the conversion rate charged by the banks may be higher than the number they previously showed.

However, the same does not apply to some online intermediaries like Skydo, and this is because we provide customers with a live foreign exchange rate. A live FX rate, unlike bank rates, is updated in real-time. So why do bank rates become more expensive than live FX rates, and how does this impact you?

Why bank exchange rates are different from the live FX rates?

Banks trade currencies with customers, as well as each other. However, the rates for both differ– the bank exchange rate is applied when banks are trading with customers, and the interbank rate applies when banks are trading with each other.&nbsp;

The interbank rate is more of a wholesale rate since banks trade with each other currencies in bulk. However, a regular consumer pays a small fee over and above paying the exchange rate. For example, if the interbank rate for buying USD is 1.00, the bank exchange rate for customers to buy USD will be 1.03.&nbsp;

Similarly, if a customer tries to sell USD, the rate offered to them will be 0.97. In each case, the bank earns 0.3 cents for acting as a middleman and helping you facilitate currency exchange. This 6-cent difference is known as the spread, to earn a profit from forex activities.&nbsp;

However, just like the currency, the spread is not constant. Various factors affect the increase or decrease in a forex spread, including the transaction amount itself. Banks charge a lesser spread for larger forex transactions to encourage bulk transactions.&nbsp;

A lower transaction amount might mean you end up paying a larger proportion of the amount in bank charges. Similarly, banks might have a smaller spread for frequently exchanged currencies and charge a larger spread for rarer currencies.

In addition to the spread, banks might charge a flat transaction fee or a certain percentage of the transaction for exchanging currency. This fee, too, is charged to drive profits.

Banks charge fees to secure themselves against currency risks (that might occur due to factors like war, inflation in other countries, or major political changes). Extra charges such as flat fees help banks achieve this while assuming less risk.&nbsp;

Banks have higher operational expenses of handling and processing cash than online brokers and intermediaries. Hence, online intermediaries pass on the cost savings to you in the form of lower fees.

The exchange rate market is highly volatile and is affected by global macroeconomic factors, other than simple demand and supply. Banks need to account for potential losses by adjusting their spread.&nbsp;

Currencies expected to depreciate or lower in demand usually see an increase in their spread for banks to mitigate their losses.&nbsp;

Indian banks must adhere to the rules of the Reserve Bank of India. These rules might be related to bank rates, insuring against risk, and adherence to them increases compliance costs. To some extent, these costs are borne by customers when they pay a transaction fee or a higher spread.&nbsp;

The RBI’s rules are subject to change depending on global factors and its own estimation of the supply and demand in India, which means the transaction fees are dynamic and never fixed.&nbsp;

How Skydo Can Help You to Save Your Money

Compared to this, carrying out your foreign exchange transaction using a service like Skydo can benefit you.

How, you ask? We operate on <a href="https://www.skydo.com/blog/get-the-most-out-of-your-forex-savings-with-skydo?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">live FX rates</a> and charge zero margins or hidden transaction charges. Yes, you read that right. Unlike the volatile transaction fees, spreads, and other charges levied by banks, Skydo has a flat fee and provides a <a href="https://www.skydo.com/blog/get-the-most-out-of-your-forex-savings-with-skydo?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">transparent pricing system</a>.

Similarly, our clear and easy-to-understand thresholds inform you of exact costs compared to the ever-changing bank rates that regularly need a cost-benefit analysis.&nbsp;

Some of our other important features include:

In short, in an age of convenience and quick transactions, going through a bank to exchange your currency might be an outdated solution for your business needs. Recognizing the benefits that a service like <a href="https://www.skydo.com/?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=demo_click">Skydo</a> can provide is important for your convenience but crucial to financial operations.&nbsp;

Our user-friendly interface helps you instantly set up an account, create invoices, and start doing transactions in no time. Businesses doing bulk forex transactions may save up to Rs 10 lakh annually, among other benefits.

<a href="https://www.skydo.com/?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=demo_click">Book a free demo</a> to experience fast, cost-saving, and transparent cross-border payment experiences.&nbsp;

Ans: An exchange rate is the rate at which one currency can be converted into another. For example, the exchange rate to convert rupees into dollars can be 1 Re= 83 USD.

Q2. What fees do banks charge for currency exchange?

Ans: Multiple factors compel banks to charge different types of rates to exchange currencies. The spread is a charge levied to cover the cost of exchanging the currency as a broker. There are also flat fees or a percentage of the transaction charged for banks to cover operational costs, handling fees, etc. Charges to ensure safety against risk and compliance with RBI guidelines are other reasons banks charge a lot.

Q3. What is the difference between an exchange rate and the real effective exchange rate?

Ans: An exchange rate is the rate used to convert one currency from another. The Real Effective Exchange Rate (REER) gauges the value of a country's currency in relation to a weighted average of the currencies of countries that are its primary or general trading partners. While the exchange rate is a straightforward measure, the REER is much more comprehensive and shows how a nation’s exchange rate holds up compared to other countries while also considering the inflation rates.

Ans: NEER, also known as the Nominal Effective Exchange Rate, measures how a country’s exchange rate holds up against other foreign currencies. Real Effective Exchange Rate, or REER, on the other hand, is a comprehensive measure because it also accounts for the price level, inflation rates, and other factors.&nbsp;

Ans: Several factors, such as demand and supply of the particular currency, global conditions such as war or famine, political stability, central bank interventions and policies, and interest rates, determine a country’s exchange rate.

Why Do Bank Exchange Rates Differ From Live FX Rates in Currency Exchange Th

large_Why Do Bank Exchange Rates Differ From Live FX Rates in Currency Exchange Th

medium_Why Do Bank Exchange Rates Differ From Live FX Rates in Currency Exchange Th

small_Why Do Bank Exchange Rates Differ From Live FX Rates in Currency Exchange Th

thumbnail_Why Do Bank Exchange Rates Differ From Live FX Rates in Currency Exchange Th

This guide is your manual to understand trade credit - the financial GPS that can keep your collaborations running smoothly, making success your constant companion.

Trade credit is an arrangement wherein a supplier allows a buyer to purchase goods or services, deferring payment for a specified period. It serves as a short-term financing option. Typically, trade credit terms outline the credit period, interest rates, and repayment conditions. Credit terms in international trade aren't uniform,&nbsp; varying across businesses and industries.&nbsp;

Trade credit is a common practice, enabling companies to maintain inventory levels, meet operational needs, and navigate economic fluctuations.&nbsp;

Credit limits are not static and can change over time based on the buyer's evolving credit history, based on assessment of the creditworthiness. Borrowers who consistently maintain a positive credit history may find opportunities for credit limit increases.&nbsp;

Consider this case study of Grasim Pvt Ltd. and US Fitness Inc.

In a <a href="https://www.skydo.com/blog/building-a-global-network-for-your-cross-border-business?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">cross-border collaboration</a>, Grasim Pvt Ltd., known for its custom mobile applications, engages with US Fitness Inc., a leading US fitness firm. The task involves delivering three specialized mobile apps tailored to suit the unique needs of US Fitness Inc.’s operations.

According to the terms, US Fitness Inc. commits to making payments within fifteen days of receiving each mobile application. Grasim Pvt Ltd. delivers the first app as the collaboration unfolds, and US Fitness Inc. has a fifteen-day window to complete the payment. This process repeats for the subsequent two applications, each installment with a fifteen-day payment timeline.&nbsp;

The trade-credit terms allow US Fitness Inc. to evaluate each application before making payments. This arrangement aids their decision-making process and benefits the working capital requirement.&nbsp;

For Grasim Pvt Ltd., the trade credit terms provide a stable cash flow, with staggered payments offering financial predictability throughout the transaction. This case study exemplifies the strategic use of trade credit in <a href="https://www.skydo.com/blog/cut-international-transaction-costs-with-skydo?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">international transactions</a>, fostering a mutually beneficial relationship between the two businesses.

Open account trade credit allows buyers to receive goods upfront and defer payment within an agreed period.

Trade acceptance introduces a more formal structure where a detailed draft outlines payment terms.

A promissory note is a written commitment where the borrower pledges to repay a specific amount by a predetermined date.&nbsp;

Understanding different types of effective financial arrangements is crucial for the following reasons:

Recording trade credit involves choosing between cash and accrual accounting methods, each impacting financial statements and cash flow differently.

mediaLibraryStrapi

The accounting of trade credit transactions is done when actual payment occurs. This provides a straightforward view of actual cash movements, making it simpler for small businesses. However, it doesn’t accurately represent the financial health as it doesn't consider credit transactions until payment.

Accrual accounting recognizes transactions when incurred, not when cash changes hands. For trade credit, this means recording transactions when goods or services are received, regardless of the payment date. It accurately represents a business's financial position, requires meticulous record-keeping, and may not align with actual cash flow.

<a href="https://www.skydo.com/blog/top-accounting-tools-for-tech-exporters?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Cash accounting</a> can make cash flow appear more stable. Accrual accounting, however, may reveal fluctuations in financial health, showing credit transactions that still need to translate into cash.&nbsp;

Larger businesses therefore adopt accrual accounting, which complies with Generally Accepted Accounting Principles (GAAP) and provides a more comprehensive financial picture.

The Cost of Trade Credit and How to Calculate It

Grasim Pvt Ltd. offers US Fitness Inc. a 2.5% discount on the project cost of 1 million USD for making payment within 7 days. The calculation of the early payment discount is as follows:

Early Payment Discount = 1,000,000 USD × 2.5% = 25,000 USD

However, US Fitness Inc. must weigh this discount against the value of their working capital. For example, if it needs to borrow funds for early payment, then the cost of borrowing must not exceed the early payment discount.

In the above example, late payments by US Fitness Inc. would incur a 1% penalty on the project cost. The calculation for late payment penalties is as follows:

Late Payment Penalty = 1,000,000 USD × 1% = 10,000 USD

To avoid these penalties, US Fitness Inc. must evaluate each delivered mobile application within the fifteen-day window, aligning with their decision-making process and minimizing the risk of late payments.

Best Practices for Extending and Utilizing Trade Credit

Implementing these best practices enhances the effective management of trade credit, minimizes risks, and optimizes financial resources for businesses.

1. Regularly Check and Analyze Customer Credit History

3. Finance Trade Receivables Through Invoice Discounting or Factoring

Trade credit is a catalyst for business expansion, fostering mutually beneficial relationships. But one must maintain a delicate balance in controlling credit and payment terms.&nbsp;

Businesses can navigate the complexities of trade credit by regularly assessing customer credit histories and considering tools like trade credit insurance. This proactive management safeguards against potential pitfalls and sets the stage for a resilient and prosperous B2B ecosystem.&nbsp;

Ans: Any business that buys and sells goods or services can use trade credit. Trade credit is particularly common in the business-to-business (B2B) context.

Ans: The cost of trade credit is the interest or discount a business may incur when it uses credit terms to make purchases. It is essentially the opportunity cost of not paying for goods or services upfront.

Ans: Trade credit can be long-term and short-term, depending on the agreed-upon terms between the buyer and the supplier. Short-term trade credit is more common, with payment typically due within a few weeks or months after the delivery of goods or services. However, some trade credit arrangements may extend to longer periods (in specific industries).

Growing Global

Understanding Global Payments blogs