Bankers uneasy over risks around Re trade | The Financial Express

Bankers uneasy over risks around Re trade

“When banks from India raise money from foreign investors, they are implicitly signing up for no dealing with sanctioned entities as their investors are committed to it,” the banker quoted above said.

Bankers uneasy over risks around Re trade
Even so, banks have set in motion the process for opening vostro accounts amid requests for such accounts from both sanctioned and non-sanctioned entities from countries such as Russia and Belarus.

Not just the fear of repercussions for dealing with sanctioned entities, risks around settlement and liquidity with respect to activating rupee trade are weighing on bankers’ minds.

Even so, banks have set in motion the process for opening vostro accounts amid requests for such accounts from both sanctioned and non-sanctioned entities from countries such as Russia and Belarus.

Bankers FE spoke to said that one of the difficulties of enabling trade transactions in rupee is the presence of a counterparty risk. “When we undertake the transaction for the customer here, there is no telling who is settling the transaction at the other end or whether it will go through smoothly. It is tough to carry out that kind of due diligence for every transaction. The Swift channel is a much smoother and safer option from that perspective,” said a senior banker.

There is also an element of liquidity risk arising out of a trade differential between countries with which rupee trade is being sought to be initiated. In order for a trade transaction to be settled in rupees, the counterparty in the other country should be holding adequate rupee funds in their nostro account with the correspondent bank. Since there is a mismatch between India’s exports and imports with the countries in question, in some cases there are not enough rupee funds in the nostro account for the transactions to be initiated.

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Of course, the threat of being penalised for doing business with sanctioned entities remains. Doing so could also mean a breach of fundraising covenants for some banks. “When banks from India raise money from foreign investors, they are implicitly signing up for no dealing with sanctioned entities as their investors are committed to it,” the banker quoted above said.

However, the government is reported to be keen on banks making use of the Reserve Bank of India’s (RBI’s) window for rupee-based trade settlement in order to protect the domestic currency from depreciation. Banks have initiated the process for opening some accounts.

Two bankers said it is merely a matter of time before some vostro accounts are opened. “Some of the banks which want to use the channel would like to make sure they have permissions from their central banks to do so. They are in the process of doing that. Also, you have to be a correspondent bank to do these transactions. Some of the interested banks are not correspondent banks and are in the process of acquiring that status,” said a senior executive with a large public sector bank.

Bankers have sought clarity from the RBI on what they see as “grey areas” in the central bank’s July 11 circular on trade settlement in rupees. Some of them have read the circular’s mention of the Financial Action Task Force’s (FATF) public statement as a clear indication of trade with sanctioned jurisdictions being prohibited. “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 counter measures,” the circular said.

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