Proposed RBI framework set to give money-changing business a makeover

Last week, Gautam Ashra, head of Kanji Pitamber & Co, a 103-year-old forex brokerage, got a buyout offer from a private equity firm. “I told them to wait; will think and let them know.” Firms like Ashra’s are in the spotlight in the backdrop of Mint Road’s ‘Draft Licensing Framework for Authorised Persons (APs) under the Foreign Exchange Management Act, 1999’. This architecture was last subject to a review almost two decades ago (in March 2006); and the changes are expected to chisel a new ecosystem. Mint Road’s deadline for feedback to its draft ends today.

Among the proposed measures is a new category of money changers who can operate through the agency model by becoming forex correspondents (FxCs). 
 

They (the technical classification being authorised dealers-II, AD-II) are to be allowed to put through trade-related deals up to Rs 15 lakh (per transaction).
 

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“We are both into forex brokerage and money changing. The new framework will change my business model. I am planning to set up an online marketplace for forex, just like what a Policybazaar.com does for insurance,” says Ashra.
 

Even the big boys in the trade are excited.

“The move to allow money changers to remit up to Rs 15 lakh is a forward looking move by the central bank. It has opened a new revenue stream for us,” says Mahesh Iyer, managing director (MD) and chief executive officer, Thomas Cook (India).
 

What’s playing out is that Mint Road is set to clean up the business and make it more organised with higher governance standards.
 

“Many of the nearly 1,700 money changers will vanish. New players coming in may use technology although in our industry the brick-and-mortar model should be followed to keep controls and checks,” says Rajneesh Bansal, MD, Paul Merchants. It is an indirect way of putting it across that this is a very sensitive trade; and not many will utter the word hawala.
 

Despite the billions of dollars it handles, the money-changing business is largely faceless. Many of the early entrants had their roots in the old-world forex brokerage business targeted at banks. 
 

There’s been a shakeout here as well, with only 15 of them active now, down from the 40-odd a few years ago (it was 125 in 1998). Five – Kanji Pitamber & Co, F R Ratnakar & Co, Vrijlal Thakar & Co, Govindram & Sons, and Mecklai & Mecklai – control 75 per cent of the volumes.
 

Take the $3,000 you are entitled to in forex. Seasoned travellers stay well within this ceiling (which, by extension, also means that they will not be a big audience for money changers who have to come up with better ideas to cater to them). You have pre-paid travel cards issued by banks; and, of course, credit cards. (Not many money changers issue prepaid cards, even though there’s nothing in the Reserve Bank of India’s rulebook which explicitly bars them from applying for a licence for this.)

These are avenues which will be up for innovation; what is unsaid is that banks will now have a fight on their turf in some of these verticals: Prepaid-cards and travel offerings. The new framework says that for forex encashment, up to Rs 50,000 per person may be made in the form of cash by FxCs. Beyond this limit, payment shall have to be made through banking channels or prepaid instruments.

 

Integration game
 

The stage appears to be set for integrated players: Those offering tourism-related services, forex and cards will survive. Like Thomas Cook or Ebix, which purchased the Centrum Group’s forex business – Centrum Direct – for Rs 1,300 crore in 2018. Centrum Direct was into overseas remittances, prepaid travel cards and travellers’ cheques. It has also partnered tuition-fee payment aggregators for processing outward remittances, and claims to have a 40 per cent market share in this area.
 

Outside of money changing, look at TripMoney – an arm of MakeMyTrip – which bought a majority stake in BookMyForex, an online foreign exchange services provider, in April 2022. In the forex brokerage business, the last deal among voice-brokers was in May 2018, when Crest Ventures purchased the 48 per cent stake held by Prebon Holdings BV in Tullett Prebon (India) for Rs 4.52 crore. There may simply be no takers for monoline businesses here on.
 

Free play 
 

New investments are expected to flow in, but there are issues to be ironed out in a business which has a preponderance of mom-and-pop outlets. Section IV of the new framework has it that “The transactions carried out by the FxCs on ADs’ [authorised dealers] behalf shall be reflected in the books of the principal AD.” Industry sources point out that the business models of banks and AD-IIs are substantially different. That the Foreign Exchange Dealers’ Association of India (Fedai) is tilted towards banks even though it is AD-IIs, which are more customer oriented.

It is here that a major fault line which has opened up after Mint Road’s draft omnibus framework for self-regulatory organisations (SROs) rears its head in money changing as well – of heavyweights among the member entities calling the shots. Understandably, Bhaskar Rao, MD of Orient Exchange (India), is for a new SRO instead of prescribing to Fedai. “AD-IIs may be asked to start an SRO. Or, if there is any association like MCAMTA, it can be asked to convert into SRO.”

MCAMTA is a lobby group: All India Association of Authorised Money Changers & Money Transfer Agents.An old peeve may be raised again. Money changers believe pricing of physical forex can be better when compared with banks if they get free play to import it. Mint Road allows only select AD-IIs to do so for their retail sales. But banks have no such curbs, and can sell it to money changers. This, some feel, has created an uneven playing field.

The argument here is that in all major global markets forex is imported by money changers, and not by banks – just as there are wholesale bullion importers, or, for that matter, private firms which transport thousands of crores of rupees daily in cash to load automated teller machines.

The whiff of cash, it always smells good.

Change is coming

• ---The country’s framework for foreign exchange was last reviewed nearly two decades ago, in March 2006
• ---What is proposed is a new category of money changers working on an agency models
• ---The stage is being set for integrated players: Those offering tourism-related services, forex and cards
• ---New investments are expected to flow in the largely faceless business, but issues have to be sorted out