Correspondent Banking and NRI Accounts
Introduction :
Given the increase in international trade and finance, there has been an ever—growing
need for a relationship between banks across borders to facilitate cross border
handling of trade documents, receipts and payments.
In addition, a large number of Indians living abroad has fuelled
the growth of NRI banking and the interaction of Indian banks
with foreign counterparts.
In this unit, you will learn about:
- The concept, need and applications of
correspondent banking
- Electronic modes of transmission of financial
messages
- Concept of NRI banking and accounts
Correspondent Banking :
Correspondent banking involves two banks having mutual
accounts with each other across geographical limits to facilitate the
transfer of money.
In a larger sense, correspondent banking facilitates a relationship
between banks and financial intermediaries to service the banking
needs of their clients without having account relationship.
Correspondent banking has the following advantages:
- Reduction in costs for banks, as the need for a global
network is eliminated
- Mitigation of road blocks created by regulatory restrictions
for the operations of foreign banks
- Availability of opportunities in other countries with low
operational costs
Correspondent Banking - An Example
First Street Bank has branches only within India. Pioneer
Imports, an Indian customer, wants to make a payment of
USD 100,000 to Transworld Exports in America.
Transworld Exports has an account with Smithson Brothers
Bank in America.
First Street Bank has a correspondent banking
arrangement with Grenfeld Bank in America. Therefore,
First Street Bank maintains a current account
denominated in USD with Grenfeld Bank. Hence, to make
payments in dollars, First Street Bank instructs Grenfeld
Bank to debit its current account and make a payment to
Smithson Brothers Bank through a SWIFT message.
On receiving the receipt of the SWIFT message, Grenfeld
Bank debits the current account of First Street Bank by
USD 100,000 and then by using the local payment system,
pays the amount to Smithson Brothers Bank. On the
receipt of USD 100,000, Smithson Brothers Bank credits
the amount to the account of Transworld Exports.
Types of Bank Accounts :
Bank accounts are a major function in the realm of
correspondent banking and generate good revenue for
the international banks. The account facilitates handling of
receipts and payments, collections and reimbursements in
the country and currency of the correspondent bank.
The foreign currency accounts maintained by a bank with
another bank are classified as NOSTRO, VOSTRO and
LORO accounts. Banks also maintain mirror accounts of
the NOSTRO accounts.
LORO Account :
A LORO account refers to 'his account with them'. For example,
Citibank referring to American Express' account with SBI Mumbai,
is a LORO Account for Citibank, NY.
NOSTRO Account:
A NOSTRO account means 'our account With YOU'- For example,
SBI maintaining a USD account with Citibank, New York is a
NOSTRO account in the books of SBI, Mumbai and a VOSTRO
account for Citibank, NY
VOSTRO Account:
A VOSTRO account is 'your account With US'. For example,
American Express, NY maintaining a rupee account With SBl is a
VOSTRO account in the books of SBI, Mumbai and a NOSTRO
account for American Express, NY.
Mirror Account :
While a bank maintains NOSTRO accounts with a foreign bank, it
has to keep an account of the same in its books. This is more or
less a reflection or shadow of the NOSTRO account.
The entries in the mirror account are maintained in two currencies,
one of which is the foreign currency and the other one is the home
currency.
Electronic Modes of Transmission :
Payment gateways exist to give support to the vast international trade and finance network.
Different needs based on the client requirement, regulatory requirement, and availability of technology have given rise to various gateways.
SWIFT : Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a co-operative entity owned by banks. It
provides fast, secure and reliable messaging services to banks and companies.
Messages are exchanged between banks by using Bank Identifier Codes (BIC) also popularly known as SWIFT BIC
codes. A SWIFT BIC is an 11-character code indicating the name of the bank, country, city and branch location.
For instance, BIC of Oriental Bank of Commerce, Mumbai is ORBCINBBPMS, where:
- ORBC demotes Oriental Bank of Commerce
- IN denotes India
- BB denotes Mumbai
- PMS denotes the branch
SWIFT is used by more than 11,000 financial institutions in 200+ countries, exchanging an average of 27.5 million messages per day.
Banks mainly use the SWIFT Net Messaging Service to exchange messages among themselves.
CHIPS :
The Clearing House Interbank Payments System (CHIPS) is a funds-transfer system that transmits and settles payment orders in US. dollars for some of the largest and most active banks in the world.
CHIPS in the USA. is a hybrid payment system; meaning it computes net obligations of the participant and at
periodical intervals, transfers the funds from/to the participants accounts maintained with the Federal Reserve Bank
of New York.
Funds can be transferred using CHIPS Universal Identifier (UID). Currently, CHIPS has 50 participant banks
(including SBI) through whom the funds are transferred.
CHIPS is operative only in New York and is mainly used for Foreign Exchange inter-bank settlements.
FEDWIRE : Fedwire is the real-time gross settlement system (RTGS) operated by the Federal Reserve System of United States
for transfer of funds within United States. Fedwire is restricted to the USA. and handles majority of the domestic
payments.
Banks that maintain a Fedwire account are allotted a unique ID called ‘ABA numbers' to identify the senders and
receivers of payments.
CHAPS : The Clearing House Automated Payments System (CHAPS) is one of the largest real-time gross settlement (RTGS)
systems in the world.
CHAPS is based in London and operates on similar principals as that of CHIPS. Currently, it has 18 members, and
approximately 400 financial institutions across the world use this system for a same day transfer of funds in sterling
pounds (Great British Pound - GBP).
TARGET :
Trans-European Automated Real-Time Gross Settlement Express Transfer System (TARGET) is an RTGS system
operating in Eurozone for exchanging payments denominated in Euro (EUR). TARGET caters to around 30,000
participating institutions across Europe.
TARGET 2 is an updated version of TARGET. RTGS-Plus and EBA are the other Euro clearing systems.
RTGS System in India :
The Reserve Bank of India has implemented the RTGS system for Indian banks- A detailed explanation is as follows.
The RTGS system provides real-time transfer of funds across India in Indian rupees. The name 'reaI-time gross
settlement' indicates that the payment instructions are executed as soon as they are received (in real time) and are paid
off on a gross basis that is without any netting. The money is credited to the account of the beneficiary instantly.
If the money cannot be credited for any reason, the receiving bank would have to return the money to the remitting bank
within 2 hours. Once the money is received back by the remitting bank, the original debit entry in the customer's account
is reversed. In India, the minimum amount, which can be transferred using RTGS, is Rs. 2 Iakhs.
IDBRT Hyderabad manages RTGS and the RBI maintains the central server. RTGS facilities are available to all types of
customers like individuals, partnership firms, companies and so on.
Non-Resident Indians :
As perthe Foreign Exchange Management Act (FEMA), 1999, a non-resident Indian (NRI) means a person residing outside
India who is a citizen oflndia. This includes Indian citizens residing abroad for employment or having their own business. It
also includes Indian citizens working abroad forforeign governments and Indian government officials deputed abroad.
A person oflndian origin who is a citizen ofany other country (otherthan Pakistan and Bangladesh) has to meet certain criteria.
Helshe should ideally have held an Indian Passport at some point in time. Helshe should have parents or grandparents as
citizens oflndia or he/she should be the spouse of an Indian citizen.
The following images describe some individuals and their citizenships.
Non-resident Indian :
Mahesh, an Indian citizen has gone out of lndia
for a permanent employment in New York. He is a
non-resident Indian.
Rohit, an Indian citizen resides in Spain. He is visiting
his relatives in New Delhi for2 months. He is a non-
resident Indian.
Resident of India :
Meeta, an Indian citizen, has gone to Sydney to visit
her brother. She will return within 10 days. She is a
resident of India.
Mallika. a person of lndian origin (PIO) has arrived in
Mumbai to work in a company as a front line manager.
She is a resident of lndia.
Global Exports :
Global Exports has 60% of its ownership with Rahul,
an NRI residing in the United States. The company is
treated as an Overseas Corporate Body (OCB). OCB's
have facilities as those ofindividual NRls.
Facilities to NRI's :
NRIs have been allowed to invest in India in various
securities, schemes and avenues so thatthe precious
foreign exchange earned by them is used forthe
development ofthe country.
Investments by the NRls have been broadly categorised
into two segments.
Repartriation Basis :
On repatriable basis, NRIs can make investments in
securities shares and bonds. These investments can
be done with the funds brought from abroad or in
freely convertible currencies or by debiting their NRE
or FCNR accounts.
An NRI is also permittedto purchase shares and
debentures issued by Indian companies. This can be
done eitherthrough the stock exchanges under
portfolio investment scheme or by taking foreign direc
investment (FDI) route. This is subjectto compliance with specified terms and conditions underthe Foreign Exchange Management Act.
Non-Repartriation Basis :
An NRI can also invest without any limit in government
securities, treasury bills, units of domestic mutual
funds, units of money market mutual funds,
non-convertible debentures issued by an Indian
company and national plan/saving certificates on the
non-repatriation basis.
As per RBI guidelines, NRIIPIO can also deal in
exchange traded derivative contracts approved by the
Securities and Exchange Board oflndia (SEBI).
Howeverthis has to be out oleRfunds held in India on non-repatriable basis, subjectto the limits
prescribed by the SEBI.
Purchasing of Real Estate by NRI's :
Ramesh is a married software engineer and is considering a ajob offered by one ofthe top software brands based in Doha.
Before accepting the offer and shifting to Doha, he has certain queries about his future investments, as one cannot purchase real
estate in Doha. Ramesh meets a consultant to find a solution to his problem.
Ramesh: Hello Mr. Kumar, I have certain queries about my investments
in India afterl shift to Doha.
l'.'Ir. Kumar: Please go ahead.
Ramesh: I am a bit worried about the future. Will I be able to purchase
property in India even afterl become an NRI?
l'.'Ir. Kumar: Yes Ramesh. An NRI or a PIO can purchase immovable
property in India except for agricultural land/plantation property or a
farmhouse out of repatriable or non-repatriable funds. The payment of
the purchase should be made from the funds received in India through
normal banking channels.
Ramesh: How can this be done?
Mr. Kumar: It can be done by way ofinward remittance from any place
outside India orfunds held in any non-resident account maintained in
accordance with the FEIvIA and RBI regulations.
Ramesh: What happens ifthe NRI sells the property?
Mr. Kumar: If an NRI or a PIO sells the property, the sales proceeds can be repatriated abroad, subjectto certain conditions.
Ramesh: Hmmm... I understand it now. What about the availability of
loans?
I'.'lr. Kumar: NRIs and POIs have several options to take loans in India.
They are allowed to take foreign currency loans against the security of
their FCNR (B) account or mortgage loans can be taken against
residential property.
Ramesh: Can third parties also take loans?
I'.'Ir. Kumar: Yes. Third parties can also take loans against the security
ofthe money held in deposit accounts of an NRI.
Ramesh: Thank you Mr. Kumar. I am certainly relieved now. By the way,
would I retain all the facilities available, ifl plan to return?
I'llr. Kumar: NRIs returning to India can use the facility ofthe Resident
Foreign Currency (RFC) Account with an authorised dealerto transfer
investments/savings abroad and money available in their NRE/FCNR
(B) accounts.
Ramesh: What about RFC accounts?
l‘.'lr. Kumar: The RFC Account is free from foreign currency utilisation
restrictions. These accounts can be in the form of current orterm
deposits.
Ramesh: I am glad thatl consulted you Mr. Kumar. Nowl am ready to
shift abroad without fearing about my future investments and savings.
Thank you.
Mr. Kumar: My pleasure.
Summary :
In this unit, you have learnt the following:
- The non-residentsegment has grown in Indian
banking overthe years.
- Varieties of products have been introduced to caterto
this segment.
. As correspondent banking essentially involves
institutions across borders, several agreements
needto be put in place, and these activities are
regulated by the RBI for controlling risk.
Introduction :
Given the increase in international trade and finance, there has been an ever—growing
need for a relationship between banks across borders to facilitate cross border
handling of trade documents, receipts and payments.
In addition, a large number of Indians living abroad has fuelled
the growth of NRI banking and the interaction of Indian banks
with foreign counterparts.
In this unit, you will learn about:
- The concept, need and applications of
correspondent banking
- Electronic modes of transmission of financial
messages
- Concept of NRI banking and accounts
Correspondent Banking :
Correspondent banking involves two banks having mutual
accounts with each other across geographical limits to facilitate the
transfer of money.
In a larger sense, correspondent banking facilitates a relationship
between banks and financial intermediaries to service the banking
needs of their clients without having account relationship.
Correspondent banking has the following advantages:
- Reduction in costs for banks, as the need for a global
network is eliminated
- Mitigation of road blocks created by regulatory restrictions
for the operations of foreign banks
- Availability of opportunities in other countries with low
operational costs
Correspondent Banking - An Example
First Street Bank has branches only within India. Pioneer
Imports, an Indian customer, wants to make a payment of
USD 100,000 to Transworld Exports in America.
Transworld Exports has an account with Smithson Brothers
Bank in America.
First Street Bank has a correspondent banking
arrangement with Grenfeld Bank in America. Therefore,
First Street Bank maintains a current account
denominated in USD with Grenfeld Bank. Hence, to make
payments in dollars, First Street Bank instructs Grenfeld
Bank to debit its current account and make a payment to
Smithson Brothers Bank through a SWIFT message.
On receiving the receipt of the SWIFT message, Grenfeld
Bank debits the current account of First Street Bank by
USD 100,000 and then by using the local payment system,
pays the amount to Smithson Brothers Bank. On the
receipt of USD 100,000, Smithson Brothers Bank credits
the amount to the account of Transworld Exports.
 |
| Correspondent Banking - An Example |
Types of Bank Accounts :
Bank accounts are a major function in the realm of
correspondent banking and generate good revenue for
the international banks. The account facilitates handling of
receipts and payments, collections and reimbursements in
the country and currency of the correspondent bank.
The foreign currency accounts maintained by a bank with
another bank are classified as NOSTRO, VOSTRO and
LORO accounts. Banks also maintain mirror accounts of
the NOSTRO accounts.
LORO Account :
A LORO account refers to 'his account with them'. For example,
Citibank referring to American Express' account with SBI Mumbai,
is a LORO Account for Citibank, NY.
NOSTRO Account:
A NOSTRO account means 'our account With YOU'- For example,
SBI maintaining a USD account with Citibank, New York is a
NOSTRO account in the books of SBI, Mumbai and a VOSTRO
account for Citibank, NY
VOSTRO Account:
A VOSTRO account is 'your account With US'. For example,
American Express, NY maintaining a rupee account With SBl is a
VOSTRO account in the books of SBI, Mumbai and a NOSTRO
account for American Express, NY.
Mirror Account :
While a bank maintains NOSTRO accounts with a foreign bank, it
has to keep an account of the same in its books. This is more or
less a reflection or shadow of the NOSTRO account.
The entries in the mirror account are maintained in two currencies,
one of which is the foreign currency and the other one is the home
currency.
Electronic Modes of Transmission :
Payment gateways exist to give support to the vast international trade and finance network.
Different needs based on the client requirement, regulatory requirement, and availability of technology have given rise to various gateways.
SWIFT : Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a co-operative entity owned by banks. It
provides fast, secure and reliable messaging services to banks and companies.
Messages are exchanged between banks by using Bank Identifier Codes (BIC) also popularly known as SWIFT BIC
codes. A SWIFT BIC is an 11-character code indicating the name of the bank, country, city and branch location.
For instance, BIC of Oriental Bank of Commerce, Mumbai is ORBCINBBPMS, where:
- ORBC demotes Oriental Bank of Commerce
- IN denotes India
- BB denotes Mumbai
- PMS denotes the branch
SWIFT is used by more than 11,000 financial institutions in 200+ countries, exchanging an average of 27.5 million messages per day.
Banks mainly use the SWIFT Net Messaging Service to exchange messages among themselves.
CHIPS :
The Clearing House Interbank Payments System (CHIPS) is a funds-transfer system that transmits and settles payment orders in US. dollars for some of the largest and most active banks in the world.
CHIPS in the USA. is a hybrid payment system; meaning it computes net obligations of the participant and at
periodical intervals, transfers the funds from/to the participants accounts maintained with the Federal Reserve Bank
of New York.
Funds can be transferred using CHIPS Universal Identifier (UID). Currently, CHIPS has 50 participant banks
(including SBI) through whom the funds are transferred.
CHIPS is operative only in New York and is mainly used for Foreign Exchange inter-bank settlements.
FEDWIRE : Fedwire is the real-time gross settlement system (RTGS) operated by the Federal Reserve System of United States
for transfer of funds within United States. Fedwire is restricted to the USA. and handles majority of the domestic
payments.
Banks that maintain a Fedwire account are allotted a unique ID called ‘ABA numbers' to identify the senders and
receivers of payments.
CHAPS : The Clearing House Automated Payments System (CHAPS) is one of the largest real-time gross settlement (RTGS)
systems in the world.
CHAPS is based in London and operates on similar principals as that of CHIPS. Currently, it has 18 members, and
approximately 400 financial institutions across the world use this system for a same day transfer of funds in sterling
pounds (Great British Pound - GBP).
TARGET :
Trans-European Automated Real-Time Gross Settlement Express Transfer System (TARGET) is an RTGS system
operating in Eurozone for exchanging payments denominated in Euro (EUR). TARGET caters to around 30,000
participating institutions across Europe.
TARGET 2 is an updated version of TARGET. RTGS-Plus and EBA are the other Euro clearing systems.
RTGS System in India :
The Reserve Bank of India has implemented the RTGS system for Indian banks- A detailed explanation is as follows.
The RTGS system provides real-time transfer of funds across India in Indian rupees. The name 'reaI-time gross
settlement' indicates that the payment instructions are executed as soon as they are received (in real time) and are paid
off on a gross basis that is without any netting. The money is credited to the account of the beneficiary instantly.
If the money cannot be credited for any reason, the receiving bank would have to return the money to the remitting bank
within 2 hours. Once the money is received back by the remitting bank, the original debit entry in the customer's account
is reversed. In India, the minimum amount, which can be transferred using RTGS, is Rs. 2 Iakhs.
IDBRT Hyderabad manages RTGS and the RBI maintains the central server. RTGS facilities are available to all types of
customers like individuals, partnership firms, companies and so on.
Non-Resident Indians :
As perthe Foreign Exchange Management Act (FEMA), 1999, a non-resident Indian (NRI) means a person residing outside
India who is a citizen oflndia. This includes Indian citizens residing abroad for employment or having their own business. It
also includes Indian citizens working abroad forforeign governments and Indian government officials deputed abroad.
A person oflndian origin who is a citizen ofany other country (otherthan Pakistan and Bangladesh) has to meet certain criteria.
Helshe should ideally have held an Indian Passport at some point in time. Helshe should have parents or grandparents as
citizens oflndia or he/she should be the spouse of an Indian citizen.
The following images describe some individuals and their citizenships.
Non-resident Indian :
Mahesh, an Indian citizen has gone out of lndia
for a permanent employment in New York. He is a
non-resident Indian.
Rohit, an Indian citizen resides in Spain. He is visiting
his relatives in New Delhi for2 months. He is a non-
resident Indian.
Resident of India :
Meeta, an Indian citizen, has gone to Sydney to visit
her brother. She will return within 10 days. She is a
resident of India.
Mallika. a person of lndian origin (PIO) has arrived in
Mumbai to work in a company as a front line manager.
She is a resident of lndia.
Global Exports :
Global Exports has 60% of its ownership with Rahul,
an NRI residing in the United States. The company is
treated as an Overseas Corporate Body (OCB). OCB's
have facilities as those ofindividual NRls.
Facilities to NRI's :
NRIs have been allowed to invest in India in various
securities, schemes and avenues so thatthe precious
foreign exchange earned by them is used forthe
development ofthe country.
Investments by the NRls have been broadly categorised
into two segments.
Repartriation Basis :
On repatriable basis, NRIs can make investments in
securities shares and bonds. These investments can
be done with the funds brought from abroad or in
freely convertible currencies or by debiting their NRE
or FCNR accounts.
An NRI is also permittedto purchase shares and
debentures issued by Indian companies. This can be
done eitherthrough the stock exchanges under
portfolio investment scheme or by taking foreign direc
investment (FDI) route. This is subjectto compliance with specified terms and conditions underthe Foreign Exchange Management Act.
Non-Repartriation Basis :
An NRI can also invest without any limit in government
securities, treasury bills, units of domestic mutual
funds, units of money market mutual funds,
non-convertible debentures issued by an Indian
company and national plan/saving certificates on the
non-repatriation basis.
As per RBI guidelines, NRIIPIO can also deal in
exchange traded derivative contracts approved by the
Securities and Exchange Board oflndia (SEBI).
Howeverthis has to be out oleRfunds held in India on non-repatriable basis, subjectto the limits
prescribed by the SEBI.
Purchasing of Real Estate by NRI's :
Ramesh is a married software engineer and is considering a ajob offered by one ofthe top software brands based in Doha.
Before accepting the offer and shifting to Doha, he has certain queries about his future investments, as one cannot purchase real
estate in Doha. Ramesh meets a consultant to find a solution to his problem.
Ramesh: Hello Mr. Kumar, I have certain queries about my investments
in India afterl shift to Doha.
l'.'Ir. Kumar: Please go ahead.
Ramesh: I am a bit worried about the future. Will I be able to purchase
property in India even afterl become an NRI?
l'.'Ir. Kumar: Yes Ramesh. An NRI or a PIO can purchase immovable
property in India except for agricultural land/plantation property or a
farmhouse out of repatriable or non-repatriable funds. The payment of
the purchase should be made from the funds received in India through
normal banking channels.
Ramesh: How can this be done?
Mr. Kumar: It can be done by way ofinward remittance from any place
outside India orfunds held in any non-resident account maintained in
accordance with the FEIvIA and RBI regulations.
Ramesh: What happens ifthe NRI sells the property?
Mr. Kumar: If an NRI or a PIO sells the property, the sales proceeds can be repatriated abroad, subjectto certain conditions.
Ramesh: Hmmm... I understand it now. What about the availability of
loans?
I'.'lr. Kumar: NRIs and POIs have several options to take loans in India.
They are allowed to take foreign currency loans against the security of
their FCNR (B) account or mortgage loans can be taken against
residential property.
Ramesh: Can third parties also take loans?
I'.'Ir. Kumar: Yes. Third parties can also take loans against the security
ofthe money held in deposit accounts of an NRI.
Ramesh: Thank you Mr. Kumar. I am certainly relieved now. By the way,
would I retain all the facilities available, ifl plan to return?
I'llr. Kumar: NRIs returning to India can use the facility ofthe Resident
Foreign Currency (RFC) Account with an authorised dealerto transfer
investments/savings abroad and money available in their NRE/FCNR
(B) accounts.
Ramesh: What about RFC accounts?
l‘.'lr. Kumar: The RFC Account is free from foreign currency utilisation
restrictions. These accounts can be in the form of current orterm
deposits.
Ramesh: I am glad thatl consulted you Mr. Kumar. Nowl am ready to
shift abroad without fearing about my future investments and savings.
Thank you.
Mr. Kumar: My pleasure.
Summary :
In this unit, you have learnt the following:
- The non-residentsegment has grown in Indian
banking overthe years.
- Varieties of products have been introduced to caterto
this segment.
. As correspondent banking essentially involves
institutions across borders, several agreements
needto be put in place, and these activities are
regulated by the RBI for controlling risk.
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