Are Bangladesh and India ready for BTK and IRS transaction?

An Indian nationalized commercial bank - The State Bank of India, which has been operating for four decades in Dhaka, has suspended export-import transactions in dollars with Bangladesh, raising concern among the business community of both the countries as India is the second highest import source for Bangladesh. At present there are no agreements between Bangladesh Bank and the Reserve Bank of India about settling transactions in BTK and IRS.

On July 11th, 2022, the Reserve Bank of India announced a big decision by allowing trade settlements between India and other countries in IRS. This measure is aimed at facilitating the growth of global trade with emphasis on export from India and to support the interests of the global trading community in Indian rupees. The Circular further states that the exchange rate between currencies of two trading partner countries may be market determined and the entire process will be carried out using a special Vostro account.

To accept payments in rupees, authorized dealer banks will be able to open special Rupee Vostro accounts. A Rupee Vostro account is a foreign bank’s account with an Indian bank in rupees in India. For example, HSBC holding an account with the State Bank of India in the Mumbai branch, denominated in rupees, is called a Rupee Vostro account. Foreign parties will be able to send and receive money from Indian exporters and importers via these Rupee Vostro accounts. On the other hand, a Nostro account refers to an Indian bank’s account with a foreign bank in foreign currency in the foreign country. It’s like SBI holding an account with HSBC in London, denominated in British pounds.

Reserve Bank of India (RBI) is trying to make the IRS globally acceptable for trade by letting settlements happen in Indian currency, instead of US Dollar. RBI’s efforts will bear fruits, if any, only in the long term and experts don’t see anything changing soon.

When countries import and export goods and services, they must make payments in a foreign currency. Since the US Dollar is the world’s reserve currency, most of these transactions are entered into US dollars. For example, if a Bangladeshi buyer enters into a transaction with a seller from India, the buyer has to first convert his Taka into US dollars. The seller will receive those dollars which will then be converted into Indian Rupees.

As per Foreign Trade policy of India, all export contracts and invoices shall be denominated either in freely convertible currency or Indian rupees but export proceeds shall be realized in freely convertible currency. However, export proceeds against specific exports may also be realized in rupees, provided it is through a freely convertible Vostro account of a non-resident bank situated in any country other than a member country of Asian Clearing Union (ACU) or Nepal or Bhutan. Additionally, rupee payment through Vostro account must be against payment in free foreign currency by buyer in his non-resident bank account. This is to facilitate greater trade in Rupee. Previously Rupee invoicing was allowed but it was not so popular as surplus Rupee were not allowed to be channeled back into Rupee assets. Now they are. For a currency to be globally acceptable, capital flows and trade must be liberalized hand in hand.  Here, both the parties involved have to incur the conversion expenses and bear the risk of foreign exchange rate fluctuations.

As per Indian media report, an Indian textile exporter, who asked not to be identified, said banks and importers in Bangladesh were not willing to trade in rupees, however, and preferred the taka currency instead. Moreover, the Bangladesh central bank’s executive director told Reuters, “No such decision has been taken yet,” in reference to trade in local currencies with India. Recently, the Bangladesh central bank freed up banks to do transactions in Chinese yuan, so as to enable trade with China. The permission allows the Bangladeshi Banks to open Nasto Account in RMB as the primary step for transaction in RMB and Taka.

In order to initiate the transaction in BTK and IRS, the bank of a partner country may approach the authorized dealer (AD) bank in India for the opening of a Special IRS vostro account and vice versa to open special BTK account in any Bank in Bangladesh by an AD branch of Indian Bank. The AD bank will seek approval from the Bangladesh Bank and Reserve Bank of India with details of the arrangement to go forward.

The AD bank will seek approval from the RBI with details of the arrangement to go forward. AD banks in India have been permitted to open Rupee Vostro Accounts. Accordingly, for settlement of trade transactions with any country, AD bank in India may open Special Rupee Vostro Accounts of correspondent bank/s of the partner trading country. Indian traders undertaking imports via this mechanism shall make payments in rupees which shall be credited into the Special Vostro account of the correspondent bank of the partner country. Indian exporters shipping goods and services under this mechanism shall be paid export proceeds in rupees from the balances in the designated Special Vostro account of the correspondent bank of the partner country. In order to allow settlement of international trade transactions through this arrangement, Indian importers can pay in IRS which will be credited into the Special Vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods or services from the overseas seller/supplier. Indian exporters, undertaking exports of goods and services through this mechanism, will be paid the export proceeds in IRS from the balances in the designated Special Vostro account of the correspondent bank of the partner country.

The International Monetary Fund (IMF) had already included the Chinese currency in its currency basket - SDR (special drawing rights). As per Bangladesh Bank rules, banks are allowed to maintain foreign currency clearing accounts with the central bank in the US dollar, the pound sterling, the euro, the Japanese yen, the Canadian dollar, and the Chinese renminbi but not Indian Rupee.

In the past, efforts were made to popularize the euro and the RMB to counter the dominance of the USD.  Multiple currencies may reduce the risk of US sanctions. But there must be inflows and outflows to enjoy the benefit of carrying out trade in multiple currencies.

Recently, The Bangladesh Bank formed a committee of five members to review that circular – to see if transaction in rupee is viable for Bangladesh.  The committee made a presentation in the presence of the Bangladesh Bank governor where the committee showed that transactions in rupee will make Bangladesh a loser as the country is in huge deficit with trade in India.

The surprise instruction of the State Bank of India to Indian exporters to avoid settling deals with Bangladesh in the dollar and other major currencies with a plea to look to curb exposure to Dhaka’s falling reserves, according to an internal document and a source is a confusing and frustrating for Bangladesh as even India is not prepared for such transaction in IRS with Bangladesh.

The writer is a Non-Government Adviser, Bangladesh Competition Commission. He can be contacted at [email protected]