RBI allows standalone primary dealers to borrow in foreign currency

The Reserve Bank of India (RBI) on Friday allowed standalone primary dealers (SPDs) to borrow in foreign currency from their parent companies and entities it has authorised. They may access overdraft facilities in nostro accounts solely for operational use, the regulator said.

Nostro is a bank account held in another country by a domestic bank, but in the currency of the foreign country. An SPD dealing in euros would open an account with a bank in the European Union for transaction settlements.

A senior executive with an SPD said the regulator’s announcement would aid in managing funding for the foreign exchange business.

As of March 31, 2023, there were seven SPDs, registered as non-banking financial companies (NBFCs) with the RBI.

The RBI has also included SPDs within the scope of norms for risk management and inter-bank dealings, enabling them to engage in foreign exchange products. SPDs were in 2018 authorised to offer forex products to clients, including foreign portfolio investors. SPDs have been classified as Authorised Dealer Category-III. Their work in forex products will constitute part of their non-core activities.

'There was under discussion. It is basically to smoothen and facilitate the foreign exchange operation of primary dealers,' said a senior executive at a standalone primary dealership.

Borrowings must adhere to the prescribed limits for foreign currency. Excess withdrawals not adjusted within five days must be reported to the RBI. Such reporting should occur within 15 days from the end of the month in which the limits are exceeded. Reporting is not required if arrangements are in place for value dating, said the Reserve Bank.

'Standalone primary dealers are now allowed to start quoting in forex and FX can have settlement failure, and those can be funded by our parents. So, this was on expected lines,' said a senior executive at a primary dealership.

According to RBI data, funds mobilised by SPDs rose by 44.4 per cent on a year-on-year basis in 2022-23. Borrowings remained the major source of their funding, accounting for 90.3 per cent of the total sources of funds.

A board of authorised dealers may set the Net Overnight Open Position Limit (NOOPL) for calculating the capital charge on forex risk. However, such limits should not exceed 25 per cent of the dealer's total capital (Tier-I and Tier-II capital).

Additionally, the RBI has updated directions on reporting foreign exchange derivative contracts conducted over the counter and foreign currency interest rate derivative contracts to the Trade Repository of the Clearing Corporation of India.

Opening Avenues 

 

- SPD dealing in euros would open an account with a bank in the European Union for transaction settlements

- SPDs included in norms for risk management and inter-bank dealings 

- Classified as Authorised Dealer Category-III, work of SPDs in forex products will constitute part of their non-core activities

- Excess withdrawals not adjusted within five days must be reported to the RBI