Reserve Bank of India on Monday said it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR.
All Category-I Authorised Dealer (AD) banks shall require prior approval from the Foreign Exchange Department of Reserve Bank of India, Central Office at Mumbai, before putting in place this mechanism, the banking regulator said.
The broad framework for cross-border trade transactions in INR under FEMA Act 199 is as under:
Invoicing: All exports and imports under this arrangement may be denominated and invoiced in Rupee (INR).
Exchange Rate: Exchange rate between the currencies of the two trading partner countries may be market-determined.
Settlement: The settlement of trade transactions under this arrangement shall take place in INR in accordance with the procedure laid down in Para 3 of this circular.
The AD banks in India are permitted to open Rupee Vostro Accounts under Regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016. Accordingly, RBI has taken a decision that AD bank in India may open Special Rupee Vostro Accounts of correspondent bank/s of the partner trading country for settlement of trade transactions with any country. In order to allow settlement of international trade transactions through this arrangement, it has been decided that:
Indian importers undertaking imports through this mechanism shall make payment in INR which shall be credited into the Special Vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas seller /supplier.
Indian exporters, undertaking exports of goods and services through this mechanism, shall be paid the export proceeds in INR from the balances in the designated Special Vostro account of the correspondent bank of the partner country.
*A Vostro account is defined as an account that a correspondent bank holds on behalf of another bank. For example, The Vostro account HSBC Manchester U.K is held by SBI in India.
How does it work?
For opening a special Vostro account, the bank of a partner country is required to approach an AD bank in India for opening the account. The AD bank will seek approval from the Reserve Bank with details of the arrangement. AD bank maintaining the special Vostro Account shall ensure that the correspondent -bank is not from a country or jurisdiction in the updated FATF Public Statement on High Risk & Non-Co-operative Jurisdictions on which FATF has called for countermeasures.
Usual export/import documentation undertaken and settled shall be according to usual documentation and reporting requirements.
Letter of Credit (LC) and other trade-related documentation may be decided mutually between banks of the partner trading countries under the overall framework of Uniform Customs and Practice for Documentary Credits (UCPDC) and incoterms. “Exchange of messages in safe, secure, and efficient way may be agreed mutually between the banks of partner countries,” RBI said.
Indian exporters may receive advance payment against exports from overseas importers in Indian rupees through the above Rupee Payment Mechanism. However, before allowing any such receipt of advance payment against exports, Indian Banks shall ensure that available funds in these accounts are first used towards payment obligations arising out of already executed export orders/export payments in the pipeline. In order to ensure that the advance is released only as per the instructions of the overseas importer, the Indian bank maintaining the Special Vostro account of its correspondent bank shall, apart from usual due diligence measures, verify the claim of the exporter with the advice received from the correspondent bank before releasing the advance.
Setting-off of export receivables: ‘Set-off’ of export receivables against import payables in respect of the same overseas buyer and supplier with the facility to make/receive payment of the balance of export receivables/import payables, if any, through the Rupee Payment Mechanism may be allowed, as provided in Master Direction on Export of Goods and Services 2016 (as amended from time to time).
Issue of Bank Guarantee for trade transactions, undertaken through this arrangement, is permitted subject to adherence to provisions of FEMA Notification and the provisions of Master Direction on Guarantees & Co-acceptances.
The Rupee surplus balance held may be used for permissible capital and current account transactions in accordance with mutual agreement. The balance in Special Vostro Accounts can be used for payments for projects and investments, Export/Import advance flow management, and investment in Government Treasury Bills, Government securities, etc. in terms of extant guidelines and prescribed limits, subject to FEMA and similar statutory provision, According to RBI circular.