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the story So Far: Last week, government officials informed that 20 Russian banks, including Rosbank, Tinkoff Bank, Centro Credit Bank and Credit Bank of Moscow, have opened Special Rupee Vostro Accounts (SRVAs) with partner banks in India. All major domestic banks have empaneled their nodal officers to resolve issues faced by exporters under the arrangement.
What is SRVA regime?
A vostro account is an account that domestic banks maintain for foreign banks in the former’s home currency, in this case, the rupee. Domestic banks use it to provide international banking services to their customers who have global banking needs. It is an integral branch of correspondent banking that enables a bank (or an intermediary) to facilitate wire transfers, conduct business transactions, accept deposits and collect documents on behalf of another bank. It helps domestic banks to have wider access to foreign financial markets and serve international customers without being physically present abroad.
SRVA is an addition to the existing system which uses freely convertible currencies and works as a complimentary system. For perspective, freely convertible currencies refer to currencies permitted by the rules and regulations of the country concerned to be converted into major reserve currencies (such as the US dollar or pound sterling) and for which there is a considerable margin for dealing against major currencies. Active market exists. Thus existing systems are required to maintain balance and position in such currencies.
How does this work?
The framework comprises three important components, namely invoicing, exchange rate and settlement. Invoicing involves that all exports and imports must be denominated and invoiced in INR. The exchange rate between the currencies of the trading partner countries will be determined by the market. To conclude, the final settlement also happens in Indian National Rupee (INR). Authorized Domestic Dealer Banks (those authorized to deal in foreign currency) are required to open SRVA accounts for correspondent banks in the participating trading country. Domestic importers are required to make payment (in INR) to the correspondent bank’s SRVA account against the invoice for the supply of goods or services from the overseas seller/supplier. Similarly, domestic exporters are to be paid export proceeds (in INR) from the balance in the specified account of the correspondent bank of the participating country.
In so far as advances against exports are concerned, it would be the responsibility of the domestic bank to ensure that the available funds are utilized to meet the existing payment obligations, i.e. export orders already executed or From export payments in the pipeline. , All reporting of cross border transactions is to be done as per extant guidelines under Foreign Exchange Management Act (FEMA), 1999.
What is the eligibility criteria of banks?
Banks in participating countries are required to approach an authorized domestic dealer bank to open an SRVA. The domestic bank will then seek approval from the apex banking regulator, providing details of the arrangement.
It shall be the responsibility of the domestic banks to ensure that the correspondent bank is not from a country mentioned in the latest Financial Action Task Force (FATF) Public Statement on High Risk and Non-Cooperative Jurisdictions. Domestic banks should also submit the financial parameters relating to the concerned bank for perusal.
Authorized banks can open multiple SRV accounts for different banks in the same country. Further, the balance in the account may be repatriated to the freely convertible currency and/or currency of the beneficiary participant country, depending on the underlying transaction for which the account was credited.
What is its purpose?
The Economic Survey (2022-23) had argued that the framework could substantially reduce the “net demand for foreign exchange, particularly the US dollar, for settlement of current account related trade flows”. It added that the framework would also reduce the need to hold foreign exchange reserves and dependence on foreign currencies, making the country less vulnerable to external shocks. The survey argues that Indian exporters can receive advance payments in INR from foreign customers and promote INR as an international currency in the long run.
According to the Bureau for International (BIS) Settlements’ Triennial Central Bank Survey 2022, the US dollar was the most dominant vehicle currency accounting for 88% of all trades. INR accounted for 1.6%.