No meddling as 'middlemen' in forex conversion by banks: New rules forbid conversion of foreign earnings into rupees to detriment of exporters

No bank can now sneak in as a middleman to make money before dollars reach the bank of a small exporter, an Indian shareholder earning a dividend from an overseas company, or an individual receiving a gift from an NRI relative.

In a regulatory directive, banks, acting as intermediaries, have been forbidden from converting foreign exchange into rupees unless there's a specific instruction.

In a regular transaction, dollars should ideally flow from the bank account of an overseas person sending funds to the nostro account of the recipient's bank. A nostro account, here, would mean a foreign currency account held by an Indian bank with an overseas partner bank.


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However, often a third bank, on the back of relationships it had with the sender's bank, stepped in to receive the dollars. The latter would then convert the forex into rupees and subsequently transfer INR funds to the receiver's bank. Ideally, the forex conversion should have been done by the recipient's bank. Instead, it was done by an intermediary bank.

As a result, many small exporters with little bargaining power or individuals unfamiliar with banking transactions got a raw deal, ending up receiving less INR than they were supposed to.

This was simply because the intermediary bank converted the forex at an adverse exchange rate, say at ₹90 to a dollar instead of ₹93, to allegedly pocket the difference. The Reserve Bank of India raised the issue relating to conversion by authorised dealer banks with the industry body Foreign Exchange Dealers' Association of India (FEDAI).

Following this, FEDAI advised all member banks on Thursday that with a view to "ensure clarity and consistency", an intermediary bank "should not convert a foreign currency inward remittance into INR solely for the purpose of onward credit to a beneficiary's account maintained with another bank, unless specifically instructed by the remitter or the beneficiary."

Some of the large Indian private banks having old ties with offshore banks became intermediaries.

"This has been happening for a long time. Small exporters, after receiving less than what they expected, complained and often grudgingly accepted. Now, if they had forward contracts (under which they had sold dollars that would be received later at a pre-agreed rate), the contracts had to be cancelled. That was extra cost besides losing out on the forex conversion rate," a senior banker told ET.

Chances are that this would now come to an end with FEDAI categorically spelling out the dos and don'ts. In the absence of any instruction on conversion, the remittance should be retained in the original currency and routed onward; and, where a specific instruction for conversion into INR is received from the remitter or the beneficiary, the conversion may be undertaken at the prevailing exchange rate, "as per the policy and laid down norms of the converting bank", said the communique to member banks. It would help, said another banker, if recipients ask the remitter to categorically instruct intermediary banks not to convert the forex.

Banks have to ensure strict compliance with the guidance while handling inward foreign currency remittances and instruct their branches and operating units accordingly.

In another email, banks have also been told that service charges for forex transactions should be aligned with the nature, complexity and effort involved in providing the service. Besides, beginning October, banks have to disclose the card rates for currency conversion on their websites with a hyperlink that allows clients to compare buy/sell rates offered by various banks.