The Reserve Bank of India (RBI) has decided to stop issuing licences for full-fledged money changers (FFMCs), which have long been the high-street face of India's forex market handling travellers' currency trades. Instead, the RBI is introducing a new class of intermediaries called forex correspondents, to be appointed by authorised dealers.
New Rules for Franchisees
The updated regulations prohibit fresh franchisee tie-ups by FFMCs and mandate a two-year winddown of existing networks. Previously, authorised dealers and FFMCs could appoint franchisees, but these franchisees were limited to buying foreign currency from the public. The RBI has now shifted to a principal-agent model through the Forex Correspondent Scheme. Under this scheme, authorised dealers, which are largely banks, can appoint forex correspondents.
Roles and Transition
These forex correspondents are authorised to buy and sell foreign currency notes and travellers' cheques for travel purposes. They can also act as sub-agents under the Money Transfer Service Scheme. Existing franchisees have the option to transition to the new regime and become forex correspondents after the sunset window closes.
Three-Tier Authorisation Structure
The revised framework introduces a three-tier authorisation system, which lowers entry barriers compared to the 2017 regime. Previously, FFMCs were required to have net owned funds ranging from Rs 25 lakh to Rs 50 lakh.
- AD Category-I: This category is reserved exclusively for banks that have full current and capital account play.
- AD Category-II: This category is open to banks, non-banking financial companies (NBFCs), FFMCs, and forex correspondents with a two-year track record. A minimum net worth of Rs 10 crore is required. These entities can undertake non-trade current account transactions, excluding gifts and donations, and handle foreign trade transactions up to Rs 25 lakh.
- AD Category-III: This is a new category for entities offering innovative forex products or those with incidental forex exposure. A minimum net worth of Rs 2 crore is required.
The new norms aim to streamline the forex market and enhance the role of authorised dealers while phasing out the FFMC model.
