State-run banks asked to settle bilateral trade deals in local currency

New Delhi: The government has directed state-run banks to encourage local currency payments for bilateral trade transactions, a move that will cut down transaction costs and help mitigate currency risks along with spurring regional trade.

"The move is expected to curb the risk of exchange rate volatility and also ensure closer relations among the banking systems in the two countries," said a finance ministry official, requesting anonymity. Under the proposed mechanism, Indian exporters will be allowed to raise invoices and receive payments in Indian rupees while payments for imports will be made by the partner country's bank in its local currency. The two banks will then settle the transactions among themselves.

For instance, an Indian exporter will raise his invoice in rupees and get paid by his bank in India in rupees after submitting documents. The documents will then be sent to the importer's bank in the partner country which will remit an equivalent amount in the local currency to the Indian bank's branch in the partner country. The Indian bank will then convert it into Indian rupees at a pre-determined exchange rate and remit it to its international services branch in Mumbai for being credited in the vostro account. For importing into India, the same mechanism will be followed in reverse.

"It is an ideal way of reducing banking charges of exporters and importers. While trading in currencies other than the US dollar or the euro, the exporters and importer have to first convert the local currency into the dollar or the euro and then into the Indian rupee. The conversion costs are, therefore, double," points out Ajay Sahai, director-general of Fieo.

To begin with, the mechanism will be put in place in countries where Indian banks have a presence. "We are going to start with a country such as South Africa, where not only Indian banks have a good presence but also our exports and imports are more or less balanced. Gradually, we want to cover all countries," a commerce department official said.