Trade settlement in supplier's currency

Trade settlement in supplier's currency

Last month, Indian central bank issued a notification regarding settlement of payments against imports into and exports from India in local currency, rupee to be precise. While doing international trade, instead of paying and receiving convertible currencies like US dollar, invoices will be made in Indian rupee for which counterpart banks need to maintain special rupee Vostro accounts. In this case, Indian banks will have to seek approval from their central bank. Rupee vostro accounts are nothing but foreign banks' accounts with Indian banks in rupees in India.

In international banking, nostro and vostro are terms used to describe bank accounts. Nostro is referred to 'my deposit at your bank', while vostro is referred to 'your deposit at my bank'.

Under the new regulations, Indian importers can pay in Indian rupees against suppliers' bills for settlement of import payments which will be credited to rupee vostro accounts. In the case of exports, proceeds will be paid in Indian rupees from the balances held in special rupee vostro accounts of the relevant banks of trade partner countries. The notification of the Reserve Bank of India (RBI) allows the offsetting of exports against import payments with respect to the same overseas buyers and suppliers. Under this arrangement all exports and imports need to be assigned and invoiced in rupee and the exchange rate between the currencies of the two trading partners can be determined by market forces.

Settlement of payments in rupee vostro accounts is already in place. But the regulations require prior permission from the central bank before opening special rupee vostro accounts. As such, the accounts will be designated only for settlement of trade and other permissible transactions. The specialty of the regulations is that banks can use safe, secure and efficient way of messaging system in terms of agreements with counterparts. This indirectly permits banks to use alternative messaging system, bypassing swift system. Another point observed from the regulations is that India will import first, the proceeds of which will be credited in vostro accounts. Afterwards, the proceeds will be used for settlement of Indian exports. In absence of exports from India, the counterparts need to wait for settlement of their export payments. Under the procedure, counterpart countries cannot import first. As such net exporting countries can be able to execute trade with India under rupee vostro model. Net importing countries may trade following the model up to their exports to India. However, western countries belonging to a section can easily trade with India under special rupee vostro model.

Bangladesh is a net importing country. Annual imports from India are quite high as against exports, creating a big trade gap. Bangladesh exports readymade garments, vegetable fat, agro-processing goods, fish, leather goods, etc. The mode of transactions is letters of credit (LC) as well as sales contracts. The trend of letters of credit is on the decline. Bangladesh imports intermediate goods, consumer goods, capital goods, etc., mostly under letters of credit.

Settlement of trade transactions with India is made in different modes. They are: ACU mechanism, usance of payment at sight by foreign banks or offshore banking units, buyer's credit. The settlement currency is freely convertible, mostly in US dollar.

A net importing country, can Bangladesh go for trade with India under settlement arrangement of special rupee vostro accounts? For this Bangladeshi banks need to open special rupee vostro accounts with banks in India. In the same way, banks in Bangladesh need to maintain settlement accounts in the name of counterpart banks at their end. As the model requires India to import first, Bangladesh will have to export first, with overdraft facilities in settlement accounts kept by banks in Bangladesh. Exporters need to wait for payments till corresponding imports and collection of payments thereof. On receipt of payments from importers, exporters will receive payments locally. The method requires double coincidences to square the position.

Bangladesh exports are of two types based on contents used for production -- import base like readymade garments and non-import base like agro products. Exports requiring no import contents can be settled under special rupee vostro account model with prior import arrangements at equal value. The model cannot support readymade garment exports because of huge imports for this sector, contents of which are arranged from different sources.

In case of usance import, payments are made through buyer's credit. On the other hand, exports are executed on credit term. Exporters try to receive payments though arrangements of supply chain finance. Foreign suppliers face no-payment risks against their exports to Bangladesh since transactions are executed by letters of credit. But exporters need to bear realization risk because of exports under sales contracts on credit terms.

Trade is rarely executed through bilateral arrangements. Trade arrangements are facilitated by trading hubs like Singapore, Hong Kong, Dubai and Zurich. Even Bangladesh works as a trade facilitator since many global buying offices are operating here. Few direct deals are negotiated with buyers/suppliers of trading partner countries. The present trade model of Bangladesh rarely supports special rupee vosto settlement. It is possible only for those cases where exports and imports are of same value.

Other models practised in India are open account method, setting-of export receivables against import payables, Settlement of payments in beneficiaries' currencies, counter trade method, etc. These methods are supportive of exports to untapped markets.

Bangladesh has already accommodated policy for exports under open account method. There are options for adopting policies for adjustment receivables and payables against trade with the same buyers and suppliers, including direct back-to-back payment by importers on adjustment from export proceeds. Settlement of payments in beneficiaries' currencies can be introduced by allowing banks to maintain nostro accounts abroad in local currencies of trade partner countries. Counter trade arrangements can also be introduced through trade agents without involvement of banks. Surplus payables can be settled against legitimate receivables in current transactions, investment, and by way of payments against merchanting trade. Bangladesh Bank can allow exporters cum importers to go for trade settlement model under special rupee vostro accounts with India. In this case, banks need to be sure that exports and imports are executed simultaneously on same terms and conditions so that no payments remain in special rupee vostro accounts as receivables. Without adjustment, receivables remain idle in the rupee vostro accounts.

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