Higher charges levied by Authorised Dealer (AD) banks on retail/ smaller customers for foreign exchange transactions  is worrisome, according to Reserve Bank of India Deputy Governor, M Rajeshwar Rao.

Rao emphasised that customers, especially from the MSME and retail segments, have approached RBI on many occasions and expressed concern about the “high” charges levied by ADs. 

“While large corporates enjoy the benefits of tighter pricing warranted by the liquidity in our markets, charges recovered from smaller customers are not justified by higher cost of processing / warehousing small ticket transactions,” the Deputy Governor said in a recent address at the 17th FEDAI Annual Conference at Cairo, Egypt.

The FX-Retail platform was introduced to shift price discovery to an automated platform. However, banks have not encouraged customers to use that platform, he added.

“What is worrisome about the charges levied on smaller customers is the complete lack of transparency. FEDAI (Foreign Exchange Dealers’ Association of India) and banks should ensure fair and transparent pricing for less resourceful customers in the forex markets,” the Deputy Governor said.

While it was heartening to note that an increasing share of FX was being transacted electronically, this should not come at the cost of increased opaqueness in pricing. AD Banks must make an effort to be transparent in pricing instruments, he said.

Rao asked AD banks to individually, or collectively through FEDAI, ensure that the benefits of simplification, rationalisation and procedural ease reaches every customer.

The endeavour to review regulations and compliance procedures through the ‘Regulations Review Authority 2.0’  would be incomplete without the FEDAI undertaking a similar assessment of its guidelines, the Deputy Governor said.

Such an assessment was needed to identify and remove any friction or impediments in the efficient operation of foreign exchange markets and the fulfillment of regulatory objectives.

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Rules of the game

One of the most significant developments in the regulatory framework for foreign exchange management and foreign exchange markets was the shift from a rule-based, prescriptive framework to a principle-based framework.

But for a principle-based regulatory framework to work effectively, there are certain “rules of the game”.

First, the shift pre-supposes that all participants, including ADs, will accept and adopt the change in full and ensure that the regulations are implemented in a fair and transparent manner and the benefits of the flexibility provided in the regulatory framework reaches the end-users of the financial system.

Second, there has to be trust. The regulator needs to be able to trust that regulatory entities will not abuse the flexibility provided in the regulations.

Third, the shift to a principle-based framework also entrusts a much higher level of responsibility on the Authorised Dealers.

“In fact, the more we move towards a principle-based framework, the greater will be the responsibility of the ADs. For instance, under the new Overseas Investment regime, all transactions relating to ODI (or financial commitment) by an eligible resident entity in a foreign entity has to be routed through the designated AD bank.

“The AD bank is not only responsible for ensuring the bonafides of the transactions and compliance with KYC/ AML guidelines, but also compliance with FEMA provisions,” the Deputy Governor said.

The RBI had earlier come across instances of AD banks permitting remittance towards overseas investment without receiving the requisite returns from the investor entity.

“Though it was always implicit in terms of Section 10(5) of FEMA that such oversight by AD banks makes them liable for penal action under Sections 11 and 13 of FEMA, the new directions have stated it unambiguously,” Rao said.

Foreign exchange risk

With the increasing integration of the economy with the rest of the world, more entities are likely to be, directly or indirectly, exposed to foreign exchange risks, and there are likely to be demands for hedging economic exposure.

While this may be tricky given the current extent of capital account convertibility, the possibility of such hedging being permitted over a period of time as we progress further down the path of capital account convertibility needs to be carefully evaluated, he added.

Rao noted that there is a good amount of interest in rupee trading arrangements that the country has been endeavouring to put in place.

“If our efforts towards rupee invoicing bears fruit, domestic exporters and importers will not need to hedge, but there will be other opportunities in the form of their non-resident counterparts, who may need to hedge,” he said.

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