Recently, 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 (SRVA) with partner banks in India.
GS III: Indian Economy
Dimensions of the Article:
- What is the SRVA arrangement?
- Functioning of the SRVA Arrangement
- What is the eligibility criteria of banks?
What is the SRVA arrangement?
The SRVA arrangement is a supplementary system to the existing banking setup that utilizes freely convertible currencies. Here are some key points to help you understand what the SRVA arrangement is:
Vostro Accounts and Correspondent Banking
- A vostro account is an account that domestic banks hold for foreign banks in the former’s domestic currency, in this case, the rupee.
- It is a crucial aspect of correspondent banking that enables banks to offer international banking services to their clients who have global banking requirements.
Functions of Vostro Accounts
- Domestic banks use vostro accounts to facilitate wire transfer, conduct business transactions, accept deposits, and gather documents on behalf of the foreign bank.
- This helps the domestic banks to gain wider access to foreign financial markets and serve international clients without having to be physically present abroad.
The SRVA Arrangement
- The SRVA arrangement is an additional system to the existing banking setup that uses freely convertible currencies.
- The existing systems require maintaining balances and position in such currencies.
- The SRVA arrangement works as a complimentary system to facilitate transactions that cannot be executed through the existing banking setup.
Freely Convertible Currencies
- Freely convertible currencies refer to currencies that are permitted by rules and regulations of the concerned country to be converted to major reserve currencies, such as the U.S. dollar or pound sterling, and for which a fairly active market exists for dealings against major currencies.
Functioning of the SRVA Arrangement
The SRVA arrangement operates through three critical components – invoicing, exchange rate, and settlement.
- All exports and imports must be denominated and invoiced in Indian National Rupee (INR). This ensures that there is no exchange rate risk and all transactions are transparently conducted in a single currency.
- Exchange Rate
- The exchange rate between the currencies of the trading partner countries is market-determined. This means that the exchange rate is based on the prevailing market rates and not fixed by the authorities.
- The final settlement takes place in INR. The domestic importer is required to make the payment (in INR) into the SRVA account of the correspondent bank against the invoices for the supply of goods or services from the overseas seller/supplier. Similarly, the domestic exporter receives the export proceeds (in INR) from the balances in the designated account of the correspondent bank of the partner country.
Opening of SRVA Accounts
- The authorised domestic dealer banks are required to open SRVA accounts for correspondent banks of the partner trading country.
- This facilitates smooth and efficient cross-border transactions.
Advance Against Exports
- The domestic bank is responsible for ensuring that the available funds are used to meet existing payment obligations, such as from already executed export orders or export payments in the pipeline before availing an advance against exports.
- All reporting of cross-border transactions must be done in accordance with the extant guidelines under the Foreign Exchange Management Act (FEMA), 1999.
What is the eligibility criteria of banks?
- Banks from partner countries are required to approach an authorised domestic dealer bank for opening the SRVA.
- The domestic bank would then seek approval from the apex banking regulator providing details of the arrangement.
- It would be the responsibility of the domestic banks to ensure that the correspondent bank is not from a country mentioned in the updated Financial Action Task Force (FATF) Public Statement on High Risk & Non-Co-operative jurisdictions.
- Domestic banks must also put forth for perusal, financial parameters pertaining to the corresponding bank.
- Authorised banks can open multiple SRV accounts for different banks from the same country. Further, balances in the account can be repatriated in freely convertible currency and/or currency of the beneficiary partner country depending on the underlying transaction, that is, for which the account was credited.
-Source: The Hindu