Source-This post on Standalone Primary Dealers to borrow in foreign currency has been created based on the article “Standalone Primary Dealers to borrow in foreign currency ” published in “Business Standard” on 4 May 2024.
Why in the news?
The Reserve Bank of India (RBI) has recently allowed standalone primary dealers (SPDs) to borrow in foreign currency from their parent companies and entities authorized by it.
Standalone primary dealers will also be allowed to access overdraft facilities in nostro accounts solely for operational use.
NOTE- Nostro account– A nostro account is a bank account held by a domestic bank in a foreign country’s currency. This account is primarily used to facilitate foreign exchange and international trade transactions.
About Primary Dealers
Introduction–In 1995, the Reserve Bank of India (RBI) introduced the Primary Dealers (PDs) system in the Government Securities Market. This system includes independent entities specifically involved in Primary Dealer activity.
Definition– A primary dealer is an RBI-registered entity that is authorized to buy and sell government securities. There are 2 types of primary dealers in India – standalone primary dealers and bank primary dealers.
About Standalone Primary Dealer
Description-They are either subsidiaries of scheduled commercial banks or entities incorporated abroad or those incorporated under the Companies Act.
Status-They are registered as non-banking financial companies. As of March 31, 2023, there were 7 SPDs registered as non-banking financial companies (NBFCs) with the RBI.
What are the regulatory guidelines released by the RBI regarding SPDs?
1) Borrowings by SPDs must adhere to prescribed limits for foreign currency.
2) If withdrawals go over the limit and aren’t fixed within 5 days, they need to be reported to the RBI within 15 days from the end of the month when the limits were exceeded.
3) The RBI has included SPDs within the scope of norms for risk management and interbank dealings.
4) Capital Requirements and Reporting-The board of authorized dealers can set the net overnight open position limit (NOOPL) to calculate the capital charge on forex risk. This limit shouldn’t go over 25% of the dealer’s total capital.
What is the significance of the recent move of the RBI?
1) It would help SPDs in managing funding for their foreign exchange business.
2) It would facilitate and smoothen foreign exchange operations for primary dealers.
3) It will allow SPDs to fund settlement failures in forex transactions by borrowing from their parent companies.
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