The banks reached out to the Reserve Bank of India (RBI) to seek clarity on legal and regulatory grey areas around proposed rupee Vostro accounts before operationalising them to settle international trade, including that with Russia, the Economic Times reported.
What are Vostro accounts?
A Vostro account is an account that is used in correspondent banking. Here, a foreign bank acts as an agent to provide financial services on behalf of a domestic bank. The account enables domestic banks to provide international banking services to their clients with global needs.
This account keeps a foreign entity’s holdings in the Indian bank, in Indian rupees. So, when an Indian importer wants to make a payment to a foreign trader in rupees, the amount is credited to Vostro account.
Why in news?
India has stepped up its purchase of cheaper Russian crude despite international opposition and sanctions. New Delhi is looking to settle this trade in rupees to continue with its purchases.
According to a recently announced arrangement by the RBI, an authorised bank in India can open special rupee Vostro accounts of correspondent banks of any partner trading country.
In the current scenario, both private and public sector banks are reluctant to open these Vostro accounts because they re worried about getting hit by the US sanctions on Russia.
Why are banks sceptical and reluctant to open these accounts?
Since the Russian invasion of Ukraine, many Russian banks were banned from SWIFT, the global system used for transferring money across borders. Russian banks suggested that Indian banks consider joining the Russian SPFS system, the Russian alternative to SWIFT. However, Indian banks have been reluctant fearing US sanctions.
Banks are concerned about how the accumulated rupee amounts in these accounts will be repatriated without attracting penalties, in case the banks are from countries with international sanctions such as Russia. Currently, most Indian banks have substantial foreign currency-denominated portfolios and cannot afford any sanctions.
According to rules, any surplus in these rupee Vostro accounts can be invested in treasury bills and government securities. However, ambiguity remains on how the funds will be repatriated. Banks are seeking clarity on how treasury bills and government securities will be transferred to the buyers.
Banks are also concerned about invoicing in rupees and the exchange rate for the conversion of volatile currencies