GS Paper III

News excerpt

Recently, The Reserve Bank of India (RBI) proposed draft norms aimed to streamline money changers' authorization, considering widespread banking services and exploring alternative models for foreign exchange services.

More details on news:

• In a significant move aimed at revamping the foreign exchange landscape in India, the Reserve Bank of India (RBI) has released a draft for a new ‘Licensing Framework for Authorised Persons’ under the Foreign Exchange Management Act (FEMA), 1999.
• This draft seeks to rationalize the authorization process for money changers, explore alternative models for foreign exchange-related services, and bolster the services provided by AD-Category II entities.

Objective of the RBI proposal

• To meet the emerging requirements: The move aims to meet the emerging requirements of the rapidly growing Indian economy.
• To achieve operational efficiency: The RBI says the objective is to achieve operational efficiency in the delivery of foreign exchange facilities to common persons, tourists and businesses while maintaining appropriate safeguards.
•  Progressive liberalisation under FEMA: The central bank's latest decision stems from the progressive liberalisation under FEMA.
•  Global economy integration & Digitalisation:  To increase integration of the Indian economy with the global economy, digitisation of payment systems, and evolving institutional structure.

Details of the proposal made by RBI

A New Category of Money Changers

• The proposal introduces a new category of money changers known as Forex Correspondents (FxCs).
• These FxCs can conduct business through an agency model in association with Category-I and Category-II Authorised Dealers, without requiring explicit authorization from the RBI.
• This move is expected to enhance the ease of foreign exchange transactions for users and strengthen the regulatory oversight.

Perpetual Renewal of Authorizations

• The draft recommends renewing existing authorizations as an AD Category-II on a perpetual basis, provided these entities meet revised eligibility criteria.
• The perpetual renewal of authorization is anticipated to reduce bureaucratic red tape and streamline the process for AD Category-II entities.

Expanding the Scope of Business

• In a bid to expand the business scope and promote better customer experiences through innovation and competition, the RBI plans to permit AD Category-II entities to facilitate trade-related transactions up to Rs 15 lakh per transaction.
• This initiative paves the way for greater operational efficiency and a wider reach of foreign exchange services.

Principal-Agency Model

• The draft also proposes a scheme based on a principal-agency model dubbed Forex Correspondent Scheme (FCS), wherein AD Category-I or II will act as the principal for the FxCs.
• This approach is expected to provide a framework for enhanced cooperation and synergy between these entities.

How does the RBI issue authorization to money changers?

• The RBI issues authorisation in the form of a licence to authorised persons, which includes authorised entities and full-fledged money changers (FFMCs).
• Authorisation is also granted to select institutions to carry out specific foreign exchange transactions related to their business activities.
• There are a total of 101 AD Category-1 entities, and a total of 75 AD category-11 entities 1,763 AD Category-111 entities in India.

Conclusion:

Thus, proposed draft norms to rationalize the authorisation of money changers will be efficient for the forex exchange and betterment of the Indian economy through smooth exchange.