RBI’s Draft Norms for Forex and Money Changing Services

GS Paper III Indian Economy

Context: The Reserve Bank of India (RBI) has proposed draft norms to improve the reach of Forex and Money changing services.

RBI’s Revised Approach to improve the reach of Forex and Money changing services

In light of the widespread availability of banking services but limited foreign exchange-related services, RBI has proposed improving access to such services.
The Forex-related authorization is based on the Foreign Exchange Management Act (FEMA).
- This Act empowers the Central Government to regulate the flow of payments from and to anyone outside India.
- These authorizations were last reviewed in March 2006.

Currently, the Reserve Bank issues 2 types of licenses:
- To authorised dealers such as banks authorized to deal in and settle foreign exchange
- To full-fledged money changers, who provide retail services.
Special Licences are also granted to financial and other institutions to carry out specific foreign exchange transactions related to their business.

AD Category-I: They are the banks, who will have the authorisation for settlement regarding forex prepaid cards.
AD Category-II: Authorized dealers category-II can issue forex prepaid cards to residents traveling on private/business visits abroad, subject to adherence to KYC/AML/CFT requirements.
- RBI has proposed to renew an existing authorisation as an AD category-II on a perpetual basis. This will reduce the regulatory burden and enhance the ease of doing business.
- The draft proposed allowing AD Category-II entities to facilitate trade-related transactions up to a value of Rs 15 lakh per transaction.
A new category of money changers has been proposed:
- They may conduct money changing business through a principal-agency model by becoming Forex Correspondents (FxCs) of category-I and category-II authorized dealers.
- AD Category-I or AD Category-II will act as the principal for the FxCs.
- Such FxCs entities will not be required to seek authorisation from the RBI.