Since the beginning of the Eighties, the International Financial Markets are witnessing revolutionary structural changes in terms of financial instruments and the nature of lenders and borrowers. On the one hand there is a declining role for the Banks in direct financial intermediation. On the other hand there is enormous increase in securitised lending, the growth of new financial facilities of raising funds directly from investors. There is also the growth of innovative techniques such as interest rate swaps, financial and foreign exchange futures and foreign exchange and interest rate options.

International Finance has to deal with and cater to the complex financial needs relating to the global economic activities. It has to satisfy to diverse customers like individuals, commercial organizations and government owned corporations spread over various countries. By nature these requirements could not be uniform. A stream of financial products have therefore come into usage to meet specific needs of both investors and borrowers. The range of product covers fund raising, underwriting, hedging or arbitrage instruments. The dynamism, in terms of variety and packages provided, as exhibited by the International Financial & Banking market has led to the equating of Euro-banking operations, the nerve centre of global financial and banking services as "financial engineering".

The deregulation of controls in the financial markets witnessed as a global phenomenon in the last two decades characterized by relaxation of barriers separating the activities of different types of institutions, relaxation of interest rate ceiling, extension of geographical domain of existing institutions and reduction in barriers to entry into domestic financial system by both foreign and non-banking institutions, are other contributory factors for this transformation.

There are also a number emerging trends like abolition or relaxation of exchange controls, the elimination of quantitative credit ceilings, more easy repatriation terms for transferring of interest, dividend and profit earnings by foreign investors, which resulted in large foreign direct investments and flow of foreign deposits across national barriers.

The progressive dismantling of national barriers has helped the integration of national markets to forge a global financial market of course, with its attendant problems for domestic monetary and economic policies.

The term 'securitisation' is used to denote the trend, which refers to the developments of markets for a wise range of old, and new negotiable instruments. This trend has accelerated the disintermediation role of banking system as investors and borrowers bypass banks to lend and borrow directly in between themselves.

The security instruments used in this process include:

1. traditional fixed rate bonds and their numerous adoptions

2. floating rate notes (FRN)

3. Revolving Underwriting Facilities (RUF)

4. Euro-notes, Euro-commercial papers (ECP)

These instruments are increasingly replacing bank loan as means of borrowing. Under the new facilities short-term money market instruments, typically with maturities ranging from one month to six months, are issued by borrowers in the market. Until 1986, bulk of these facilities used to be issued under wider underwriting arrangements in which groups of banks guaranteed the availability of funds to the borrowers by committing to purchase papers that cannot be sold at agreed terms at each roll-over date or by providing a stand-by credit.

These facilities have the advantage of combining the beneficial features of both the short-term money market and medium and long-term capital market. Issuing short-term notes (papers) with an underwriting commitment is attractive to borrowers as it is cheaper than bank loans and also offers greater flexibility for drawdowns. At the same time long term availability of funds is ensured because of the commitment by banks.

The excessive volatility and prolonged misalignment of exchange rates and interest rates have encouraged the growth of innovative techniques to offer both hedging facilities and opportunities for speculative profits. They include:

1. Currency and interest Rate swap

2. Currency and Interest Rate options

3. Financial and foreign exchange futures.

Financial features have registered a significant expansion in recent years with the expansion of the existing futures market in certain centres, particularly London, Singapore and Amsterdam. Interest and currency futures not only offer actual hedging facilities but also speculative opportunities to market participants.

The search for banks for alternate non-funding business and also the means to retain valued client relationship led to a spurt of off-balance sheet business, mainly in the form of underwritten new facilities in the initial years and non-underwritten facilities

Similarly the quest, for shorter maturity and more liquid assets to counter balance the effectively frozen medium and long term assets in the books of the Banks led to the growth of securitised lending.

Growing deregulation in national financial markets and the revolution in telecommunication and data processing technologies resulted in the better integration of financial markets in all countries between the domestic financial system and the foreign Banking and non-banking institutions.

The development of new innovative products in the finance and credit market, though useful to transfer risks to counter parties or hedge risks, have also increased the vulnerability of the banks and other financial institutions to the vicissitudes of the market.

The problem of declining business opportunities faced by the Banks was further aggravated on account of enormous debt servicing problems faced by a good number of developing countries since 1982. This blocked sizeable assets of major international Banks as Non-productive or non-performing. Investors reacted by disinvesting in bank equity shares and the Regulatory authorities of Banks responded to the situation by pressing for adequate provisions for bad and non-performing assets and higher capital adequacy requirements. Thus the most conspicuous change in the International financial market since 1982 has been displacement of direct bank intermediation through the mechanism of syndicated loans, by a wide range of securities lending

By instinct the Banks attempted to counteract to the situation by searching for non-funding business. Their efforts to retain valued client relationship led to spurt in their off-balance sheet business, mainly in the form of underwritten new facilities in the initial years and later on to non-underwritten facilities The quest for shorter maturity and more liquid assets to counterbalance the sizeable fall in the medium and long term credit segment with the Bank, led to the growth of securitised lending.

Overall on account of the changes that had taken place in the medium term credit market, several major factors affected the Commercial Banks operating at the International level adversely. These are listed as under:

1. International Debt Problem: The problem faced by developing countries and the burden it loaded on the banks has already been referred.

2. Globalization of International Banking: Globalization has already resulted far reaching changes in the Bank profile of the United States and the Banks in Europe are naturally to follow suit. A number of mergers and other forms of consolidation have transferred capital and power away from major money center banks towards new, efficient and profitable regional and super regional banks.

3. Deregulation: The conservative era prohibiting Banks from venture into any other field other than traditional banking is giving way to a liberalized thinking that banks should be permitted to sell products hither to barred to them like property and insurance.

4. securitisation ("Maturity transformation"): This concept has already been discussed in detail.

5. Emergency of Japanese Banking: With the Dollar losing ground against major currencies, and the U.S. Banks under severe strain arising mainly out of the debt crisis, it is now the turn of the Japanese Banks to play an increasing role in the international business. This is also supported by the growing current account surplus and the high domestic savings rate of Japan

6. The Stock Market Crash.: With the stock market crash of 1987, banks have become vulnerable to the decision of depositors regarding the banks.

A major concomitant of the above developments in the international financial markets in general and the international banking arena in particular is to dramatically alter the conditions in which banks will have to function. Banks are forced to accept as realities the following

• top-notch borrowers with excellent credit ratings are deserting the banks, and

• The borrowers with excellent credit ratings are tending to fail paying back loans, but also find ways to attract and earn the capital that banks increasingly need.