RBI circular

RBI’s Guidelines on International Trade Settlement in Indian Rupees (INR) – Explanation

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Introduction

The Reserve Bank of India (RBI) has introduced a mechanism to facilitate international trade settlements in Indian Rupees (INR), aiming to bolster India’s role in global trade and simplify transactions. This arrangement, effective from July 11, 2022, offers an alternative for invoicing, payment, and settlement of trade in INR. Let’s break down the key aspects of this framework as outlined in the RBI’s circular (RBI/FED/2015-16/11 FED Master Direction No. 16/2015-16).

Key Clauses and Explanations

Clause (a): “In order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in INR, it has been decided to put in place with effect from July 11, 2022 an additional arrangement for invoicing, payment, and settlement of exports / imports in INR.”

Explanation: The RBI has initiated a new arrangement to facilitate the use of INR in international trade, beginning from July 11, 2022. This move aims to enhance India’s global trade presence and simplify the process for exporters and importers.

Clause (b): “The broad framework for cross border trade transactions in INR under Foreign Exchange Management Act, 1999 (FEMA) is as delineated below:”

Explanation: The framework outlined under FEMA specifies how trade transactions can be conducted in INR, covering aspects like invoicing and settlement procedures.

Clause (i): “All exports and imports under this arrangement may be denominated and invoiced in Rupee (INR).”

Explanation: Transactions involving exports and imports can now be invoiced and denominated in INR, providing a standardized approach for dealing in Indian currency.

Clause (ii): “Exchange rate between the currencies of the two trading partner countries may be market determined.”

Explanation: The exchange rate for converting between INR and the trading partner’s currency will be determined by the market, allowing for flexible and real-time conversion rates.

Clause (iii): “The settlement of trade transactions under this arrangement shall take place in INR in accordance with the procedure laid down in Para c.”

Explanation: Trade transactions under this arrangement will be settled in INR, following the procedures specified in the circular.

Clause (c): “In terms of Regulation 7(1) of Foreign Exchange Management (Deposit) Regulations, 2016, AD banks in India have been permitted to open Rupee Vostro Accounts. Accordingly, for settlement of trade transactions with any country, AD bank in India may open Special Rupee Vostro Accounts of correspondent bank/s of the partner trading country.”

Explanation: Authorized Dealer (AD) banks in India can open Rupee Vostro Accounts to facilitate trade settlements with partner countries, allowing for smooth transaction processing.

Clause (i): “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.”

Explanation: Indian importers must make payments in INR to the Special Vostro Accounts of correspondent banks in the partner country, which will then be credited against invoices.

Clause (ii): “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.”

Explanation: Indian exporters will receive their payments in INR from the Special Vostro Accounts held in the partner country’s correspondent bank.

Clause (d): “The export / import undertaken and settled in this manner shall be subject to usual documentation and reporting requirements.”

Explanation: Transactions settled under this mechanism must adhere to standard documentation and reporting requirements, ensuring transparency and compliance.

Clause (e): “Indian exporters may receive advance payment against exports from overseas importers in Indian rupees through the above Rupee Payment Mechanism.”

Explanation: Exporters can receive advance payments in INR, provided that available funds are first used to meet existing export obligations. Banks must verify these advances to ensure proper handling.

Clause (f): “‘Set-off’ of export receivables against import payables in respect of the same overseas buyer and supplier with facility to make/receive payment of the balance of export receivables/import payables, if any, through the Rupee Payment Mechanism may be allowed.”

Explanation: The mechanism allows for the set-off of export receivables against import payables with the ability to settle any remaining balance through the INR payment system.

Clause (g): “Issue of Bank Guarantee for trade transactions, undertaken through this arrangement, is permitted subject to adherence to provisions of FEMA Notification No. 8, as amended from time to time and the provisions of Master Direction on Guarantees & Co-acceptances.”

Explanation: Bank guarantees for transactions under this arrangement are allowed, provided they comply with FEMA regulations and the Master Direction on Guarantees & Co-acceptances.

Clause (h): “The Rupee surplus balance held may be used for permissible capital and current account transactions in accordance with mutual agreement.”

Explanation: Surplus balances in INR can be used for capital and current account transactions, such as investments and project payments, as per mutual agreements.

Clause (i): “Reporting of cross- border transactions need to be done in terms of the extant guidelines under FEMA 1999.”

Explanation: All cross-border transactions must be reported according to the existing FEMA guidelines, ensuring compliance and proper record-keeping.

Clause (j): “The bank of a partner country may approach an AD bank in India for opening of Special INR VOSTRO account. The AD bank will seek approval from the Reserve Bank with details of the arrangement.”

Explanation: Partner country banks can request AD banks in India to open Special INR Vostro Accounts. The AD banks must get RBI approval for these arrangements.

Conclusion

The RBI’s guidelines on international trade settlements in INR aim to streamline and enhance India’s position in global trade. By facilitating transactions in INR, this framework supports exporters, importers, and financial institutions in managing their cross-border trade efficiently.

RBI Update: Review of Risk Weights for Housing Finance Companies (HFCs): Key Changes and Implications

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The Reserve Bank of India (RBI) has issued a new circular, RBI/2024-25/62 (DOR.CRE.REC.33/08.12.001/2024-25), revising the risk weights for Housing Finance Companies (HFCs) in line with the Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021, dated February 17, 2021. This update is aimed at addressing specific concerns and ensuring a more accurate calculation of risk weights associated with housing finance.

Key Modifications:

  1. Risk Weighted Assets for Undisbursed Loans: One significant change pertains to the treatment of undisbursed amounts of housing and other loans. Previously, there was an anomaly in how risk weighted assets (RWAs) for undisbursed amounts were computed compared to disbursed loans. To address this, the new directive caps the RWAs for undisbursed loans to match the RWAs calculated for an equivalent amount of disbursed loans on a notional basis. This adjustment aims to streamline the risk assessment process and eliminate discrepancies.
  2. Risk Weight for Commercial Real Estate – Residential Buildings: The circular also revises the risk weights for commercial real estate, specifically residential buildings. For standard fund-based and non-fund based exposures classified under ‘Commercial Real Estate-Residential Building’, the risk weight has been adjusted to 75%. This is a reduction from the previous rate and reflects a more nuanced approach to risk management. Exposures not classified as standard will continue to be subject to the risk weight assigned to ‘Other Assets (Others)’, currently at 100%.

Implementation and Continuity:

These modifications are effective immediately from the date of issuance of this circular. It is important to note that all other instructions outlined in the Master Direction remain unchanged. HFCs must align their practices with these updated guidelines to ensure compliance and maintain effective risk management.

By refining these risk weight calculations, the RBI aims to create a more balanced and accurate framework for evaluating the risks associated with housing finance, thereby enhancing the stability and resilience of the housing finance sector.

RBI’s Modified Interest Subvention Scheme for Kisan Credit Cards: Key Updates for FY 2024-25

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The Reserve Bank of India (RBI) has recently issued Circular No. RBI/2024-25/59 (Click Here to refer the circular) regarding the “Modified Interest Subvention Scheme for Short Term Loans for Agriculture and Allied Activities availed through Kisan Credit Card (KCC) during the financial year 2024-25.” This circular continues the government’s initiative to support farmers by providing interest subvention on short-term loans. Here’s a detailed breakdown of the key points from the circular:

1. Continuation of the Scheme: The Modified Interest Subvention Scheme (MISS) will remain in effect for the financial year 2024-25. This scheme offers financial assistance to farmers through concessional interest rates on short-term loans used for agricultural and allied activities.

2. Interest Subvention Details:

  • Eligible Loans: Short-term loans for crop production and allied activities like animal husbandry, dairy farming, fisheries, and beekeeping.
  • Subvention Amount: The scheme provides an interest subvention to lending institutions including Public Sector Banks (PSBs), Private Sector Banks (in rural and semi-urban branches), Small Finance Banks (SFBs), and computerized Primary Agriculture Cooperative Societies (PACS). The interest subvention will be calculated from the date of loan disbursement to the date of repayment or the due date, whichever comes first, up to a maximum of one year.
  • Interest Rates: For the financial year 2024-25, the lending rate to farmers will be 7%, with an interest subvention of 1.50% for the lending institutions.

3. Additional Incentives:

  • Prompt Repayment Benefit: Farmers who repay their loans on time will receive an additional interest subvention of 3% per annum. This means that timely repayments will result in an effective interest rate of 4% per annum for these loans.

4. Loan Limits:

  • Overall Limit: The scheme covers short-term loans up to ₹3 lakh per farmer.
  • Allied Activities Limit: For loans related only to allied activities, the maximum limit is ₹2 lakh. Crop loans will have priority, and any remaining amount will be allocated to allied activities within the cap.

5. Benefits for Small and Marginal Farmers: To encourage better storage practices, small and marginal farmers can avail of the interest subvention for up to six months post-harvest against negotiable warehouse receipts for produce stored in accredited warehouses.

6. Relief for Natural Calamities:

  • Restructured Loans: For farmers affected by natural calamities, the interest subvention will apply to restructured loans for the first year, with normal rates applying in subsequent years.
  • Severe Calamities: For severe calamities, the subvention will apply for up to three years (or five years maximum) on restructured loans, along with the prompt repayment incentive.

7. Aadhar Linkage: Farmers must have their Aadhar details linked to their Kisan Credit Card to avail of the benefits under this scheme.

8. Reporting and Claims: Banks need to capture and report detailed data on farmer beneficiaries through the Kisan Rin Portal (KRP). Claims must be certified by statutory auditors and submitted by June 30, 2025.