Vostro accounts and how they facilitate trade

• Last week, government informed that 20 Russian banks, have opened Special Rupee Vostro Accounts (SRVA) with partner banks in India.
• All major domestic banks have listed their nodal officers to sort out issues faced by exporters under the arrangement.

What is the SRVA arrangement?

• A vostro account is an account that domestic banks hold for foreign banks in the former’s domestic currency, in this case, the rupee.
• Domestic banks use it to provide international banking services to their clients who have global banking needs.
• It is an integral offshoot of correspondent banking that entails a bank to
  • Facilitate wire transfer,
  • Conduct business transactions,
  • Accept deposits and gather documents on behalf of the other bank.
• It helps domestic banks gain wider access to foreign financial markets and serve international clients without having to be physically present abroad.
• The SRVA is an additional arrangement to the existing system that uses freely convertible currencies and works as a complimentary system.
• The existing systems thus require maintaining balances and position in such currencies.

How does it function?

• The framework entails three important components, namely, invoicing, exchange rate and settlement.
  • Invoicing: All exports and imports must be denominated and invoiced in INR.
  • Exchange rate between the currencies of the trading partner countries would be market-determined.
  • Final settlement also takes place in Indian National Rupee (INR).
• The authorised domestic dealer banks are required to open SRVA accounts for correspondent banks of the partner trading country.
• Domestic importers are required to make payment (in INR) into the SRVA account of the correspondent bank against the invoices for supply of goods or services from the overseas seller/supplier.
• Similarly, domestic exporters are to be paid the export proceeds (in INR) from the balances in the designated account of the correspondent bank of the partner country.
• All reporting of cross-border transactions are to 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.

What is its purpose?

• The Economic Survey (2022-23) had argued that the framework could largely reduce the “net demand for foreign exchange, the U.S. dollar in particular, for the settlement of current account related trade flows”.
• The framework would also reduce the need for holding foreign exchange reserves and dependence on foreign currencies, making the country less vulnerable to external shocks.
• Indian exporters could get advance payments in INR from overseas clients and in the long-term promote INR as an international currency once the rupee settlement mechanism gains traction, the survey argued.