Correspondent Banking and NRI Accounts
FOREIGN EXCHANGEMANAGEMENT ACT (FEMA)
The Foreign Exchange Management Act 1999 (FEMA) was enacted on December 02, 1999 to replace Foreign Exchange Regulation
Act (FERA) 1973. The Act came into on June 01, 2000 and extends to the entire country, all branches, offices, agencies outside India -
those owned or controlled by a person residing in India.
Objective of FEMA : (i) Facilitating external trade and payments and (ii) for promoting the orderly development and maintenance of
foreign exchange market in India.
Authorised persons (APs)
All transactions can be carried by residents and non-residents through APs. An AP may be a dealer (Authorised Dealer of Category I,
II or Category III) or a money-changer. It may be an off-shore banking unit or any other person appointed under the Act. RBI issues
licences to authorised person. It can revoke the authorisation if the person fails to comply with the conditions.
Classification of Persons Authorised to deal in Foreign Exchange
1. AD Category-I (comprising Commercial, State & Urban Coop Banks) : All current and capital account transactions according
to RBI directions issued from time-to-time.
2. Authorised Dealers Category-lI (Upgraded FFMCs, Coop Banks, RRBs and others):
Specified non-trade related current account transactions as at paragraph 3 below as also all the activities permitted to Full
Fledged Money Changers. Any other activity as decided by RBI.
3. Authorised Dealers Category-III (Select Financial and other Institutions): Transactions incidental to the foreign exchange
activities undertaken by these institutions.
4. Full Fledged Money Changers (FFMCs): (comprising Dept. of Posts , Urban Co-op. Banks and other FFMCs)
RBI powers under FEMA
RBI can prohibit, restrict and regulate various transactions such as transfer or issue of any foreign security by a resident of India and
by a person residing outside India., borrowing or lending in foreign exchange, borrowing or lending in rupees between a resident in
India and a person outside India, deposits between residents in India and residents outside India, export, import or holding of
currency or currency notes, transfer of immovable property outside India other than a lease not exceeding five years, by a person
resident in India, giving guarantee or surety in respect of any debt obligation or other liability incurred by person resident in Indian to
a person outside India and vice-versa, etc.
CORRESPONDENT BANKING
Correspondent banking: It is relationship between two banks having mutual accounts with each other or one of them is having
account with other. OR a relationship and servicing of banking needs, as agent without having account relationship.
Benefit of correspondent banking: Through correspondent banking, a bank is able to handle business in another city or country
through local banks acting as agent. The system eliminates the need to have global network branches that involves high costs.
Hence bank can take advantage of the business opportunities in other countries.
Functions handled by correspondent banks:
(a) account services such as (a) clearing house functions, (b) collections, payments, (c) overdrafts, (d) loan facility and (e)
investment services
(b) other services such as (a) LC advising, (b) LC confirmation, (c) Bankers acceptances, (d) issue of guarantees, (e) forex
services, (f) custodial services etc.
Types of accounts opened under correspondent banking: These accounts include NOSTRO, VOSTRO, LORO accounts.
NOSTRO account: This is an account of a bank in another country (say SBI's account in New York with Citibank). This is called "our
account with you".
VOSTRO account: This is an account of a foreign bank in India. (say Citibank's account in New Delhi with SRI). This is called "your
account with us".
LORO account: This is an account of a bank in another country which is used by a 3.3 bank (say for BoB, SBI's account in New York
with Citibank). This is called "Their account with them".
Mirror account: Mirror account is shadow (like a copy) of the NOSTRO account. The entries in this account are used for
reconciliation purpose.
FOREIGN EXCHANGEMANAGEMENT ACT (FEMA)
The Foreign Exchange Management Act 1999 (FEMA) was enacted on December 02, 1999 to replace Foreign Exchange Regulation
Act (FERA) 1973. The Act came into on June 01, 2000 and extends to the entire country, all branches, offices, agencies outside India -
those owned or controlled by a person residing in India.
Objective of FEMA : (i) Facilitating external trade and payments and (ii) for promoting the orderly development and maintenance of
foreign exchange market in India.
Authorised persons (APs)
All transactions can be carried by residents and non-residents through APs. An AP may be a dealer (Authorised Dealer of Category I,
II or Category III) or a money-changer. It may be an off-shore banking unit or any other person appointed under the Act. RBI issues
licences to authorised person. It can revoke the authorisation if the person fails to comply with the conditions.
Classification of Persons Authorised to deal in Foreign Exchange
1. AD Category-I (comprising Commercial, State & Urban Coop Banks) : All current and capital account transactions according
to RBI directions issued from time-to-time.
2. Authorised Dealers Category-lI (Upgraded FFMCs, Coop Banks, RRBs and others):
Specified non-trade related current account transactions as at paragraph 3 below as also all the activities permitted to Full
Fledged Money Changers. Any other activity as decided by RBI.
3. Authorised Dealers Category-III (Select Financial and other Institutions): Transactions incidental to the foreign exchange
activities undertaken by these institutions.
4. Full Fledged Money Changers (FFMCs): (comprising Dept. of Posts , Urban Co-op. Banks and other FFMCs)
RBI powers under FEMA
RBI can prohibit, restrict and regulate various transactions such as transfer or issue of any foreign security by a resident of India and
by a person residing outside India., borrowing or lending in foreign exchange, borrowing or lending in rupees between a resident in
India and a person outside India, deposits between residents in India and residents outside India, export, import or holding of
currency or currency notes, transfer of immovable property outside India other than a lease not exceeding five years, by a person
resident in India, giving guarantee or surety in respect of any debt obligation or other liability incurred by person resident in Indian to
a person outside India and vice-versa, etc.
CORRESPONDENT BANKING
Correspondent banking: It is relationship between two banks having mutual accounts with each other or one of them is having
account with other. OR a relationship and servicing of banking needs, as agent without having account relationship.
Benefit of correspondent banking: Through correspondent banking, a bank is able to handle business in another city or country
through local banks acting as agent. The system eliminates the need to have global network branches that involves high costs.
Hence bank can take advantage of the business opportunities in other countries.
Functions handled by correspondent banks:
(a) account services such as (a) clearing house functions, (b) collections, payments, (c) overdrafts, (d) loan facility and (e)
investment services
(b) other services such as (a) LC advising, (b) LC confirmation, (c) Bankers acceptances, (d) issue of guarantees, (e) forex
services, (f) custodial services etc.
Types of accounts opened under correspondent banking: These accounts include NOSTRO, VOSTRO, LORO accounts.
NOSTRO account: This is an account of a bank in another country (say SBI's account in New York with Citibank). This is called "our
account with you".
VOSTRO account: This is an account of a foreign bank in India. (say Citibank's account in New Delhi with SRI). This is called "your
account with us".
LORO account: This is an account of a bank in another country which is used by a 3.3 bank (say for BoB, SBI's account in New York
with Citibank). This is called "Their account with them".
Mirror account: Mirror account is shadow (like a copy) of the NOSTRO account. The entries in this account are used for
reconciliation purpose.
No comments:
Post a Comment