Indian Bank to hold special rupee vostro A/cs of Sri Lanka banks

Indian Bank, which has had a long presence in Sri Lanka, has received the regulatory go ahead to hold special rupee vostro accounts of three banks from the South Asian island nation which is struggling to tide over a serious foreign exchange crunch.

The Chennai-headquartered public sector bank is expected to activate the special accounts in about a week.

A vostro account in local currency would enable Lanka to import from India without dipping into its dwindling dollar supply. The INR vostro facility is part of a special trade settlement mechanism which was finalized by the Reserve Bank of India (RBI) in July 2022. The arrangement allows Indian importers to deposit rupees in vostro accounts that overseas banks open with banks in India and clearing of dues to Indian exporters from the surplus balances in the vostro accounts.


“RBI has given permission for three vostros..The accounts are expected to be functional any day now,” a person aware of the clearance told ET.

The INR vostro account --- a product of war and economic turbulence --- is considered as a tool to either overcome restrictions in the wake of US sanctions on Russian banks or continue cross-border trades amid a hard currency crisis.

“The vostro accounts would also help Lanka to utilize the rupee lines extended by India. It would contribute towards stabilizing the Lankan economy,” said a banker.

Sri Lanka President Ranil Wickremesinghe recently said 2023 would be a “critical year” for the troubled country. Last year’s balance of payments crisis had boiled over into a political turmoil in Sri Lanka.

For Sri Lankan institutions, Indian Bank, which had set up shop in the island nine decades ago, may be an obvious choice. The bank had opened its first overseas branch in Colombo in 1932. Since a decade it has had operations in Jaffna as well. Till now, State of India (SBI) is the other domestic institution with which a Lankan bank has opened a vostro account.

India's annual exports to Lanka is about $5 bn with oil, pharmaceutical products, sugar, ships, iron and steel, cotton and machinery being the main cargoes.

As the currency market in Lanka ran out of dollars, early last year most banks in India virtually stopped discounting letters of credit (LC) --- the basic trade finance instrument --- issued by banks in Lanka. Banks feared that when payments for its imports fall due, there would not be enough dollars in Sri Lanka.

“What we hear is that the government would pursue a similar vostro mechanism with banks in Bangladesh, and it may prefer to have it in place before the Bangladesh general elections in 2024,” said another banker. Bangladesh has been badly hit by a trade deficit and depleting forex reserves.

While the Ukraine war and the sanctions on Russia paved the way for the special vostro accounts, the mechanism can be used to settle trade in rupees with any country. For instance, several banks in Belarus, a close ally of Russia, are keen to enter into a similar deal with India. “A meeting between Indian and Belarusian banks is scheduled this month. The volume of trade with Belarus is much smaller compared to Russia though the country is an import supplier of fertilizer. We can sense the interest of Indian banks after the meeting,” said an industry official.

In giving greater flexibility to the vostro facility, RBI last November clarified that the rupee balances lying in the accounts can be hedged so that foreign companies can minimize their losses from foreign exchange fluctuations. Also, the central bank has allowed the transfer of balance in one special rupee vostro account to a similar account of another bank from the same country.

HIGHLIGHTS

• Special Vostro A/cs can settle cross-border trade in INR
• They can be used to overcome US sanctions, $ crunch
• Russian banks have opened a/cs; A/cs of 4 Lankan banks will be operational soon;
• Similar deals may be struck with banks in Belarus & Bangladesh