CAIIB BFM International Banking — Correspondent Banking, LC, UCP 600 & FEMA Complete Guide

Last updated by BankersClub on July 9, 2026

Quick Answer

What does BFM Module A — International Banking — actually cover?

Correspondent banking: Nostro, Vostro, Mirror accounts — three account types, three different “whose books” answers
Documentary credits: LC types (revocable/irrevocable, confirmed, revolving, back-to-back) under UCP 600
Bills for collection: URC 522 — documents against payment (D/P) vs documents against acceptance (D/A)
FEMA framework: Current account vs Capital account transactions, FDI/FPI/ECB routes
Export credit: ECGC cover, EXIM Bank role, pre-shipment vs post-shipment finance
For the calculation-heavy side of this module (cross rates, forward premiums, TT rates), see the separate BFM Forex Calculations guide — this article covers the conceptual and regulatory framework.

Why Module A Trips Up Branch Bankers

International Banking is the module where candidates without direct forex-desk or trade-finance experience lose the most marks — not because the concepts are hard, but because they are unfamiliar. A branch banker who has never processed an LC or handled a Nostro reconciliation is learning both the vocabulary and the logic simultaneously. This guide builds the conceptual map first — account relationships, instrument types, and regulatory routes — so the terminology stops being a memorisation exercise and starts being a structure you can reason through in the exam.

Correspondent Banking — Nostro, Vostro, Mirror

Account Type	Whose Account, Held Where	Currency	Memory Trigger
Nostro	“Our account” — Indian bank’s account held with a foreign bank abroad	Foreign currency	Nostro = “our money, their soil”
Vostro	“Your account” — foreign bank’s account held with the Indian bank, in India	Indian Rupees (INR)	Vostro = their money, our soil
Mirror (or Loro)	A third bank’s record of another bank’s Vostro account — used for internal reconciliation	Same as the underlying Vostro	Loro = “their account with someone else” — viewed from a third party’s ledger

Exam trap: A Nostro account is always in foreign currency and always held abroad. A Vostro account is always in INR and always held in India. If a question describes an account “held in India, denominated in USD,” it is neither — check whether it is describing an EEFC account instead (a resident’s foreign currency account held domestically).

Documentary Credits (Letters of Credit) — UCP 600

LC Type	Key Feature	When Used
Irrevocable LC	Cannot be amended or cancelled without agreement of all parties. Under UCP 600, all LCs are irrevocable by default unless stated otherwise.	Standard for almost all trade transactions today
Confirmed LC	A second bank (confirming bank) adds its own payment guarantee on top of the issuing bank’s	Exporter doubts the issuing bank’s/country’s ability to pay
Revolving LC	Credit amount automatically reinstates after each drawing, up to a set number of cycles	Repeat shipments between the same buyer-seller pair
Back-to-Back LC	A second LC issued using the first (export) LC as security, to pay the actual supplier	Intermediary/trading companies without their own funds
Transferable LC	Beneficiary can transfer all or part of the credit to a second beneficiary (must be marked “transferable”)	Trading intermediary passing the credit to the actual manufacturer
Standby LC (SBLC)	Functions as a payment guarantee — drawn only if the applicant defaults, not routinely drawn like a commercial LC	Performance guarantee, financial backstop

UCP 600 in one line: Uniform Customs and Practice for Documentary Credits, 2007 revision — governs LC issuance, examination of documents, and bank obligations globally. Banks deal in documents, not goods — a compliant document set gets paid even if the underlying goods are defective. This “documents, not goods” principle is one of IIBF’s favourite single-mark questions.

Bills for Collection — URC 522

Type	Documents Released When	Risk to Exporter
D/P — Documents against Payment	Importer pays immediately	Lower — goods/title retained until payment
D/A — Documents against Acceptance	Importer accepts a bill of exchange (usance), promising to pay on a future date	Higher — documents released before actual payment

Unlike a Letter of Credit, a bill for collection carries no payment guarantee from any bank — the bank is only acting as a collection agent between exporter and importer. This is the single biggest exam distinction between LC-based trade and collection-based trade: LC = bank guarantees payment (subject to compliant documents); Collection = bank facilitates only, payment risk rests entirely with the exporter.

FEMA Framework — Current vs Capital Account

Transaction Type	Definition	Examples	Restriction Level
Current Account	Does not alter assets/liabilities outside India of a resident, or in India of a non-resident	Trade payments, remittances for services, travel, education, medical expenses	Generally free, some items need RBI/Govt permission beyond LRS limits
Capital Account	Alters assets/liabilities outside India of a resident, or in India of a non-resident	FDI, FPI, ECB, overseas investment, property transactions	Regulated — requires specific route/approval per RBI Master Direction

LRS (Liberalised Remittance Scheme): Resident individuals may remit up to USD 250,000 per financial year for permitted current and capital account transactions combined, without prior RBI approval. This single number is one of the most frequently tested facts in this module.

Capital Inflow Routes — FDI, FPI, ECB

Route	Full Form	Nature	Typical Entry Path
FDI	Foreign Direct Investment	Long-term, control/management stake	Automatic route (most sectors) or Government route (sensitive sectors)
FPI	Foreign Portfolio Investment	Short-to-medium term, listed securities, no management control	SEBI-registered FPI route
ECB	External Commercial Borrowing	Debt raised by Indian entities from foreign lenders	Automatic route or Approval route, subject to end-use and all-in-cost ceiling

Export Credit — ECGC and EXIM Bank

Institution	Role
ECGC (Export Credit Guarantee Corporation)	Insures exporters and banks against payment default risk by overseas buyers. Offers policies to exporters (covering commercial and political risk) and guarantees to banks (covering the bank’s exposure on export credit extended).
EXIM Bank (Export-Import Bank of India)	Apex institution for financing, facilitating, and promoting foreign trade. Provides term loans for export-oriented units, overseas investment finance, and lines of credit to foreign governments/institutions to promote Indian exports.

Pre-shipment vs Post-shipment Finance

Stage	Purpose	Instrument
Pre-shipment (Packing Credit)	Working capital to procure raw material, manufacture, and pack goods before shipment	Packing Credit in Rupees or Foreign Currency (PCFC)
Post-shipment	Finance from the date of shipment until realisation of export proceeds	Negotiation/purchase/discount of export bills, advance against bills sent for collection

Master Numbers Reference — International Banking

Item	Number
LRS annual remittance limit	USD 250,000 per financial year
UCP 600 — governing rules for LCs	ICC Publication 600, 2007 revision
URC 522 — governing rules for collections	ICC Uniform Rules for Collections
Default LC type under UCP 600	Irrevocable (unless stated otherwise)
FEMA — year enacted	1999 (replaced FERA 1973)
Nostro account currency / location	Foreign currency / held abroad

Frequently Asked Questions

What is the difference between a Nostro account and an EEFC account?

A Nostro account is the Indian bank’s own account held with a correspondent bank abroad, denominated in foreign currency, used to settle international transactions. An EEFC (Exchange Earners’ Foreign Currency) account is a domestic account held in India by a resident exporter, denominated in foreign currency, allowing them to retain a portion of export earnings in foreign currency without converting to INR. Both are foreign-currency accounts, but Nostro is a bank’s correspondent account abroad; EEFC is a customer’s account within India.

Why do banks pay against a Letter of Credit even if the goods delivered are defective?

Because UCP 600 establishes the “autonomy of the credit” and “documents, not goods” principles. The issuing/confirming bank’s obligation is to examine documents for compliance with the LC terms — not to inspect goods. If the documents are compliant, the bank must pay, and the goods dispute becomes a separate commercial matter between buyer and seller, outside the banking relationship. This is a foundational, frequently tested concept.

Is a Standby LC the same as a bank guarantee?

Functionally, yes — both serve as a payment backstop drawn only on default. The distinction is regulatory and documentary: an SBLC is issued and governed under LC rules (typically ISP98 or UCP 600), while a bank guarantee is a separate instrument governed by its own contract law framework and, in India, by the Indian Contract Act provisions on guarantees. In cross-border transactions, SBLCs are more common because they are internationally standardised; bank guarantees are more common domestically.

What happens if an importer refuses to accept documents under a D/A bill?

The collecting bank does not release the documents, and the goods effectively remain under the exporter’s control through the shipping documents (bill of lading, etc.), assuming the goods have not already been released by the shipping line separately. The exporter then bears the cost and risk of re-routing, storing, or re-selling the goods — this is precisely why D/A carries higher exporter risk than D/P, and significantly higher risk than an LC-backed transaction where a bank’s payment undertaking exists independent of the buyer’s willingness to pay.

How does this module relate to the BFM Forex Calculations article — should I study them together?

Yes — they are two halves of the same IIBF module. This article covers the framework: which instrument applies to which situation, what regulatory route governs a transaction, and why. The Forex Calculations guide covers the numerical side: computing cross rates, forward premiums/discounts, and TT buying/selling rates. IIBF case-study questions frequently combine both — a scenario describing an LC transaction that then asks you to compute the applicable exchange rate. Study the framework first so the calculation questions have context.