Foreign Currency Accounts
In India, the Reserve Bank of India(RBI) has made a distinction between the citizens and non-citizens of India. The RBI makes this distinction on the basis of an individual or corporate as being a resident, non-resident or a person of Indian origin.
It allows certain categories of individuals and corporates to hold accounts either in rupee or a foreign currency. The three main types of foreign accounts are Non-resident Ordinary Rupee (NRO) account, Non-resident (External) Rupee (NRE) account and Foreign Currency Non-resident (Bank)– FCNR (B) account. All these accounts serve different purposes.
Table of Content
NRI Accounts
Before discussing deferent types of NRI accounts, it is important to define three terms: resident Indian, Non-Resident Indian (NRI) and Persons of Indian Origin (PIO). A resident Indian is an individual who is a citizen of India and lives in India. An NRI is a citizen of India who holds a valid Indian passport but has emigrated to another country for a period of six months or more for employment, residence, or education on a temporary basis. An NRI is different from a PIO.
The Foreign Exchange Management Act (FEMA), 1999, defines PIO as a citizen of any country other than Bangladesh or Pakistan fulfilling any of the following conditions:
- he at any time held Indian passport; or
- he or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 (57 of 1955); or
- the person is a spouse of an Indian citizen or a person referred to in sub-clause (a) or (b).
NRIs and PIOs in India can maintain three types of accounts. These are:
- Non-Resident Ordinary Rupee Account (NRO Account)
- Non-Resident (External) Rupee Account (NRE Account)
- Foreign Currency Non Resident (Bank) Account – FCNR (B) Account
The Reserve Bank of India (RBI) authorises NRIs and PIOs to open, hold and maintain these three types of accounts with an Authorised Dealer (AD) in India. An AD is a bank that has been authorised by the RBI to deal in foreign exchange. In addition, NRO savings accounts can also be maintained with post offices in India.
Types of Accounts
The details and provisions of the three types of accounts are as follows:
Non-Resident Ordinary Rupee Account (NRO Account)
Any person resident outside India may open an NRO account with an authorised dealer or an authorised bank for the purpose of putting through bona fide transaction in rupees. However, opening of accounts by individual/entities of Pakistan and entities of Bangladesh require prior approval of Reserve Bank of India. NRO accounts may be opened/maintained in the form of current, savings, recurring or fixed deposit accounts.
Various types of NRO accounts include the following:
- Savings account: Normally maintained for crediting legitimate dues/earnings/income such as dividends, interest, etc. Banks are free to determine the interest rates..
- Current account: Normally maintained for crediting legitimate dues/earnings/income from business transactions. Banks do not give any interest on maintaining the balances in the account.
- Term deposits: Banks are free to determine the interest rates. Interest rates offered by banks on NRO deposits cannot be higher than those offered by them on comparable domestic rupee deposits.
Non-Resident (External) Rupee Account (NRE Account)
An NRE account can only be opened by the NRI himself and not through holder of power of attorney (as defined under Regulation 2(vi) of Notification No. FEMA 5/2000-RB dated May 3, 2000). NRIs are also permitted to open NRE accounts with their resident close relatives (relative as defined in Section 6 of the Companies Act, 1956) on ‘former or survivor ‘basis.
The resident close relative shall be eligible to operate the account as a Power of Attorney holder in accordance with the extant instructions during the life time of the NRI/PIO account holder. The account may be in the form of savings, current, recurring or fixed deposit accounts. The term deposit accounts must be opened with a maturity of minimum one year.
Foreign Currency Non Resident (Bank) Account [FCNR (B) Account]
FCNR Accounts are basically Term Deposit Accounts that can be maintained in four important currencies, viz., US Dollar, Pound Sterling, and Japanese Yen. Presently it can be maintained in the new European Currency “Euro” also. The term deposit account is maintained for period ranging from one year to 3 years. On maturity, they are paid back in the same currencies.
These accounts are now known as FCNR (B) Accounts where ‘B’ stands for Banks. Since the account is maintained in foreign currency and paid back in the same currency, there is no conversion of currency takes place when balance is repatriated outside India. However if the account holder decides to convert the balance into rupees at maturity, the conversion takes place at exchange rate prevailing at the time of conversion.
NRI account is mandatory when an individual resident Indian borrows money from his close relatives outside India. An individual resident Indian can borrow a sum not exceeding USD 250,000 or its equivalent from his close relatives staying outside India, subject to the fulfilment of following conditions that:
- the minimum maturity period of the loan is one year;
- the loan is free of interest;
- the amount of loan is received by inward remittance in free foreign exchange through normal banking channels or by debit to the NRE/ FCNR(B) account of the NRI.
At this point, it is important to understand the difference between a retail banking account and a private banking account.
Private banking accounts are opened to get a much more personalized banking service by individuals after investing substantial sums, typically over U$S1M. The private banking account holder gets personalised attention of the relationship manager based on one-to-one interaction.
Wealthy individuals having private accounts are allowed to contact in person, and have direct phone access to a relationship manager. On the other hand, a retail banking account can be opened by any individual. This account includes a wide range of facilities such as savings bank accounts, credit cards and loan facility. Unlike a private bank account holder, the retail banking account holder does not get personalised banking services.
Indian Rupee and Foreign Currency Accounts
An Indian rupee account is an account that is denominated in terms of Indian rupees (INR). A foreign currency account in banking terminology refers to an account that is denominated in any currency other than the home currency. In the context of India, a foreign currency account is an account that is opened, held and maintained in any currency other than INR. Financial institutions can open foreign currency accounts for residents (onshore foreign currency accounts) and non-residents (offshore foreign currency accounts).
Such foreign currency accounts facilitate the making and receiving of payments pertaining to foreign trade in foreign currency. The foreign currency accounts provide protection against exchange rate risks and save exchange costs because income is credited into and expenses are debited from foreign currency accounts in foreign currency; therefore, there is no need to convert from one currency to other. Also, foreign currency accounts are helpful while investing large amounts of foreign currency.
Earlier, we mentioned three types of NRI/PIO accounts, namely Non-Resident Ordinary Rupee Account (NRO Account), Non-Resident (External) Rupee Account (NRE Account) and Foreign Currency Non-Resident (Bank) Account – FCNR (B) Account. Out of these, NRO and NRE accounts are denominated in INR. The FCNR (B) account is denominated in a foreign currency other than INR.
The cases wherein an individual is required to open a foreign currency account are as follows:
- An investor may diversify his/her portfolio of investments in more than one currency other than his/her domestic currency
- An individual or a company that receives income in a foreign currency and does not wish to convert the income into the home currency
- An individual or a company (such as importers) that needs to make payments to another individual or company in a foreign currency
The provision of foreign currency accounts for residents and non-residents has a lot of benefits. For foreign currency account holders, the various benefits are as follows:
- Convenience of choosing a particular currency for banking transactions
- Streamlined process of making and receiving foreign payments
- Reduced risks related to foreign exchange rate fluctuations and conversions
- Provision of opening foreign currency accounts in a wide range of currencies
- ADs offer regular statements, which help in keeping track of money and transactions
- ADs offer cheque book facility for foreign currency accounts
- ADs offer online banking support
- ADs offer anywhere banking
Foreign Currency Account in Indian Rupees
Globalisation has increased trade in goods and services across countries. For facilitating trade, the exchange of one currency to another is also required for making and receiving payments against imports and exports respectively. Globalisation has also impacted the Indian economy, which is growing rapidly.
Foreign Direct Investments (FDIs) and Foreign Portfolio Investments (FPIs) are pouring in. In addition, the number of foreign nationals visiting and staying in India for business purposes has also increased. These people are categorised either as residents or non-residents and enjoy various legal rights or face restrictions as per the Indian law.
Under Indian foreign exchange regulations, A person is said to be ‘Resident in India’, if he/she has stayed in India for a period of more than 182 days during the course of the previous financial year for the purpose of:
- taking up employment in India,
- carrying on in India any business
- vocation
- pursuing a course of study
- for any other purpose which indicates an intention to stay on for an uncertain period of time
These foreign individuals and companies that come to India need to maintain their accounts in Indian rupees for their transaction purposes.
Features of Different Types of Accounts
For dealing in foreign exchange, residents of India are entitled to open various types of foreign currency accounts. These accounts can be maintained in the form of current account or savings account or as a term deposit. As per RBI guidelines set for opening and maintaining these accounts, these foreign currency accounts can be opened singly or jointly in the name of the person eligible to open such accounts.
Further, foreign nationals resident in India are permitted to open rupee accounts in accordance with the regulations stipulated by the RBI. These foreign nationals resident in India being employees of a foreign company on deputation to the office/branch/subsidiary/joint venture in India of such foreign companies may open, hold or maintain foreign currency accounts with a bank outside India for receipt of salary payable to them for services rendered in India. Residents with foreign currency can also open foreign currency accounts.
These include people such as exporters (exchange earners), non-residents who become residents, those returning to the country with foreign exchange after a business trip or holiday and foreigners. For opening such accounts, RBI permits banks as authorised dealers in foreign exchange. However, it also permits a few non-authorised dealer bankers to maintain NRO/NRE accounts but not foreign currency accounts like FCNR accounts. Let us discuss the important features of the different types of accounts.
Features of NRO Account
Non-resident Indians can open a Non-Resident Ordinary (NRO) accounts. When an Indian leaves India for taking up employment or for any other purpose, he/she becomes a non-resident Indian. His/her bank accounts in India are called Non-resident Ordinary (NRO) accounts. These accounts can be opened either by money received from abroad in foreign exchange or out of rupees earned in India.
The salient features of NRO accounts are shown in Table:
| Feature | Description |
|---|---|
| Eligibility | Persons of Indian nationality or origin residing abroad. Accounts can be opened in single name or in joint names with another non-resident or resident Indian. Resident Indians by inward remittances from abroad. |
| Requirements | Duly filled in Account Opening form with: Copy of the Passport Visa/residence permit Two copies of recent photographs Initial money remittance |
| Types of Account | Savings Bank Account Current Account Recurring Deposit Accounts Term/Fixed Deposit Accounts |
| Currency of Account | Indian Rupees |
| Exchange Risk | The exchange risk is borne by the depositor |
| Credits in Account | Credits in the accounts can be made by: Depositing Foreign Currency Notes/Traveller Cheques Depositing cheques/instruments drawn in foreign currency Inward remittance in foreign currency or Indian Rupees from abroad Transfer from another NRE or FCNR account Depositors’ legitimate income in India If credits are received in a foreign currency, the amount is converted into Indian Rupees at prevailing exchange rates. |
| Payments/Transfers from Account | Amounts can be withdrawn from accounts for making local payments in Indian Rupees. Balances can be repatriated for any bona fide purpose up to a maximum of US dollar one million per calendar year subject to payment of taxes. |
| Account Operation | By account holder(s) |
| Interest Rate | Interest rates vary from bank to bank. |
| Nomination Facility | Available |
| Transferability | Allowed from one branch of the issuing bank to another. |
| Premature Encashment | Premature payments attract some interest penalty. |
| Interest Taxability | Income Tax at a flat rate of 30% is deducted at source on interest earned irrespective of the amount of interest. |
| Auto Renewal | The facility of auto renewal of deposits is available from banks. |
| Other Features | Income in India can be credited to NRO accounts. Rupee loans can be taken in India against the security of the deposit. Investment in shares/securities/immovable properties on non-repatriation basis can be made with general or specific permission from the RBI. |
Other features of NRO accounts are as follows:
- The repatriation of money outside India is normally not allowed. However, under certain circumstances and with the introduction of the current account convertibility and Reserve Bank permission, remittances from NRO accounts can take place.
- Non-residents who are neither Indians nor persons of Indian origin can also maintain NRO accounts with funds remitted from outside India through banking channel or by the sale of foreign exchange brought by them to India
- An NRO account is in Indian rupees.
Features of NRE Account
Non-resident Indians can open a Non-Resident External (NRE) accounts. These accounts can only be opened with money received from abroad. This excludes the money earned in a local country. If there is a joint holder in this account, he/she should be a non-resident. The salient features of NRE accounts are shown in Table:
| Feature | Feature |
|---|---|
| Eligibility | Persons of Indian nationality or origin residing abroad. Accounts can be opened in single name or in joint names with another non-resident Indian. |
| Requirements | Duly filled in Account Opening form with: Copy of the Passport Visa/residence permit Two copies of recent photographs Initial money remittance |
| Currency of Account | Accounts are maintained in Indian Rupees. |
| Types of Account | Savings Bank, Current Account and Term/Fixed Deposit Accounts can be opened. |
| Credits in the Account | Credits in the accounts can be made by: Depositing Foreign Currency Notes/Traveller Cheques Depositing cheques/instruments drawn in foreign currency Inward remittance in foreign currency or Indian Rupees from abroad Transfer from another NRE or FCNR account The credits received in foreign currency are converted into Indian Rupees at the prevailing exchange rates. |
| Payments/Transfers from Account | Payments/transfers from the accounts can be made by: Indian Rupees In foreign currency by converting Indian Rupees in foreign currency at the prevailing exchange rates. |
| Exchange Risk | The exchange risk of converting foreign currency into Indian Rupees and vice versa is borne by the depositor. |
| Account Operation | By account holder(s) Account holder(s) can grant Power of Attorney and authorise resident Indian(s) to operate Savings or Current accounts. |
| Interest Rate | Interest rate varies from bank to bank. In case of term/fixed deposits, the interest may be paid either in lump sum at the time of maturity or it may be paid every quarter or every month as opted by the depositor. |
| Nomination Facility | Available Nomination can also be made in favour of resident Indians. |
| Transferability | Allowed from one branch of the issuing bank to another. |
| Premature Encashment | Allowed subject to some interest rate penalty. |
| Interest Taxability | Exempted from Indian Income Tax |
| Auto Renewal | The facility of auto renewal of deposits is available from banks. |
| Change of Status from Non-Resident to Resident | Immediately on return of the account holder to India and on his becoming resident in India, he is required to advise the bank. His NRE account will be redesignated as resident rupees account or converted to RFC (Resident Foreign Currency) account as per his option. The fixed/term deposits shall continue to earn the earlier contracted Interest Rate till maturely. |
| Other Features | The balances in NRE accounts are free of Wealth-tax. The entire credit balance (inclusive of accrued interest) in an NRE account can be repatriated outside India at any time without reference to the Reserve Bank. Loans/overdrafts are available from banks against security of deposits in NRE accounts. Exchange risk is borne by the depositor. Investment from the account can be made in shares, debentures, mutual funds, money market mutual funds, etc. The amount invested and income on that amount can be repatriated if the required conditions are fulfilled. On return to India, the following amounts can be deposited in the RFC A/C: Balances in Bank accounts outside India and interest thereon. Dividend, interest, profit earned on investment in foreign currency in the form of shares or securities. Rent, etc. earned from immovable property outside India. Foreign exchange earnings through employment, business or vocation outside India which was taken up while staying abroad. Other facilities like International Credit/Debit cards, On-line/Internet banking, etc. are usually offered free by banks. |
Other features of NRE accounts are as follows:
- The funds held in NRE account can be freely repatriated outside India. There is no limit on amount.
- No income tax and wealth tax are charged on the interest earned.
- The account can be maintained as fixed deposit for a minimum period of one year and for a maximum period of three years.
- Account is always in Indian Rupees.
- Over drawings in NRE savings bank accounts are allowed up to a limit of ₹50,000 subject to the condition that such over drawings together with the interest payable thereon are cleared/repaid within a period of two weeks through normal banking channels or by transfer of funds from other NRE/FCNR accounts.
- Banks are free to determine the interest rates of NRE term deposits of maturity of one year and above which cannot be higher than those offered by them on comparable domestic rupee deposits.
Features of FCNR (B) Account
An account that can be opened with an Indian bank by a Non-Resident Indian or a Person of Indian Origin in foreign currency is calledan FCNR (B) account. These accounts are designated as term deposit accounts as they are maintained for a period ranging from one to five years. In an FCNR (B) account, ‘B’ stands for banks. Since the account is maintained in foreign currency and paid back in the same currency, no conversion of currency takes place when balance is repatriated outside India.
However, if the account holder decides to convert the balance into rupees at maturity, the conversion takes place at the exchange rate ruling at the time of conversion. FCNR (B) accounts can be opened by receiving the money from abroad in foreign currency or out of any money that is permissible for remittance abroad. It is the only account that allows the NRI to keep his/her deposits in foreign currency by eliminating various issues pertaining to the exchange rate.
The features of FCNR (B) accounts are as follows:
- The account is maintained in foreign currency. Pound sterling, Australian dollar, Canadian dollar, Japanese Yen, Euro and United States dollar are a few currency types in which an FCNR account can be opened by an applicant.
- The account can be opened by an Indian non-resident or a person of Indian origin. Only an NRI or a PIO can be a joint holder to this account.
- Only term deposit schemes are available under this account with a period ranging from one to five years.
- On the wish of the account holders, the accounts can be transferred to other NRE/FCNR accounts before the maturity period. Such transfers are subjected to penalties that are charged for premature withdrawals of the deposit.
- The account can be held in any freely convertible currency including Indian currency.
- Premature withdrawals of term deposit is allowed in this type of account and loss on interest earned, charges for swapping, etc., in the name of penalty is fixed by the bank where the term deposit is held. Instructions related to such penalties are mentioned by the bank in terms and conditions before the person opens an FCNR account. The same is applicable for account transfers from existing FCNR to other NRE/FCNR account.
- Renewal of term deposits is possible on maturity and the person who is willing to renew has to renew the account within 14 days after maturity. If this does not happen, then the bank will have the flexibility to fix interest rate on further renewal and also if such renewed accounts are withdrawn before a fixed overdue period of scheme, then the banks can take back the interest paid in overdue period.
- Loans can be purchased against FCNR accounts and banks will have the right to change interest rate on term deposit schemes when a loan is taken against this account.
- Loans from Indian banks in foreign currency are permissible against this account for investment purpose in India.
- All debits/credits permissible in respect of NRE accounts, including credit of sale proceeds of FDI investments, are permissible in FCNR (B) accounts as well.
- Loans can be extended against security of funds held in FCNR (B) deposit either to the depositors or third parties without any ceiling subject to usual margin requirements.
- The interest rates are stipulated by the Department of Banking Operations and Development, Reserve Bank of India. With effect from March 1, 2014 in respect of FCNR (B) deposits of maturities, 1 year to less than 3 years, interest shall be paid within the ceiling rate of LIBOR/SWAP rates plus 200 basis points for the respective currency/corresponding maturity.
For FCNR (B) deposits with maturity of 3-5 years, interest shall be paid within the ceiling rate of LIBOR/SWAP rates plus 300 basis points. On floating rate deposits, interest shall be paid within the ceiling of SWAP rates for the respective currency/maturity plus 200 bps/300 bps, as the case may be. For floating rate deposits, the interest reset period shall be six months. - All the terms and conditions as applicable to NRE accounts with respect to joint accounts, repatriation of funds, opening account during temporary visit, operation by power of attorney, and loans/ overdrafts against security of funds are also applied to FCNR (B).
RFC, RFC (Domestic), EEFC and Diamond Dollar Accounts
Usually, Indian residents are required to maintain their bank accounts in India in rupee only. However, the RBI has permitted certain categories of residents to open, hold and maintain foreign currency denominated accounts. These include three types of accounts – Resident Foreign Currency (RFC) accounts, Resident Foreign Currency (Domestic) [RFC (D)] accounts and Exchange Earners’ Foreign Currency (EEFC) accounts. Residents with foreign currency can open these accounts.
These include individuals such as exchange earners (exporters), non-residents who become residents, individuals returning to the country with foreign exchange after a business trip and foreigners. These types of foreign currency accounts are not maintained by all banks. Only a few commercial and co-operative banks that have obtained license from Reserve Bank under Foreign Exchange Management Act (FEMA), 1999 are permitted to open and operate these accounts. Let us study in detail about all these accounts.
RFC Accounts
A Resident Foreign Currency (RFC) account can be opened by a person resident in India if he/she receives foreign exchange from his/her foreign employer as pension or salary or any other monetary benefit such as superannuation. The funds in the RFC account are free from any restrictions regarding utilisation outside India. RFC accounts can also be opened by resident individuals who have come back to India after residing abroad as NRIs for some time. NRIs and PIOs usually come back to India for settling down here permanently or for relatively long periods of time.
Such individuals may bring foreign exchange earned by them while they were abroad. In addition, these individuals may also sell their movable and immovable foreign assets such as securities, property, etc., before returning to India. The amount they bring with them can be deposited in the RFC accounts. According to the existing norms, when an NRI or a PIO returns to India for permanently settling here, his/her existing NRE and/or FCNR accounts must be converted into resident accounts. However, funds held in NRE and/or FCNR accounts can be utilised to open RFC accounts.
These accounts can be maintained in any foreign currency of depositors’ choice. In addition, the individual who wishes to open the RFC account should have returned to India after April 1992. No permission from Reserve Bank is necessary for maintaining RFC accounts. The account holder can use the balance in RFC account to acquire assets abroad while the individual is still in India. In addition, the RFC holder can also open a fresh bank account outside India using these funds, spend the money for travel or business purposes, gift the amount to anyone in the world, use it for educational purposes for his/ her relatives.
The various features of the RFC account can be summarised as follows:
- RFC accounts can be maintained in the form of current or savings or term deposit accounts, where the account holder is an individual. Also, RFC accounts can be maintained in the form of current or term deposits in all other cases.
- The account can be opened in any foreign currency excluding the currency of Nepal or Bhutan.
- Persons who have been residing outside India for a continuous period of more than one year (exclusive of short visits for personal reasons) who return to India for permanent settlement should change the status of their NRO/NRE account from non-resident to resident and inform the bank of the change in status. Such persons should close NRE and FCNR (B) deposit accounts on maturity. The proceeds can be transferred either partly or completely to an RFC account.
- An RFC account can be a current, savings or fixed deposit account.
- The term of fixed deposits ranges from 30 days to 6 months.
- Cheque facility is not available for RFC current accounts.
- Nomination facility is available in RFC account.
- Loans can be granted against the balances lying in the RFC account.
- RFC accounts are permitted to be held jointly with a resident’s close relative(s) as defined in the Companies Act, 1956 as joint holder(s) in their RFC bank account.
RFC (Domestic) Accounts
The Resident Foreign Currency (Domestic) account designated as RFC (D) account was introduced in January 2003. It can be opened out of the foreign exchange acquired in the form of currency notes, bank notes and traveller’s cheques while on visit outside India, or by way of earning through export of goods/services. However, debits from these accounts shall be in accordance with the regulations stipulated by the Reserve Bank of India. The account is maintained in the form of a current account and does not bear any interest.
This account is different from an RFC account although the nomenclature of the accounts is similar. The RFC (D) account can be maintained by any resident individual even when he/she had not been abroad at any time. Thus, you can open a foreign currency account with a bank in India with money received from your relatives (gift) living outside India. This account can be opened with the gift given in foreign exchange by non-residents or NRIs when they visited India or sent from abroad.
Suppose you went to Singapore with USD 10000 purchased from the bank for sightseeing, etc., and on your return if you are left with unspent foreign exchange, an RFC (D) account can be opened with such left over cash. The account can also be opened with export proceeds received or foreign exchange earned through consultancy or other kind of services rendered to non-residents. The funds held in such an account can be utilised for personal purposes as may be approved by RBI. The funds cannot be utilised in the way as in the case of RFC accounts.
Various features of the RFC (D) account are as follows:
- Saving in commission charges related to foreign currency conversions because the account holder can withdraw foreign currency when required without incurring any conversion charges
- Facilitates payments for foreign travel expenses
- Convenient and value-added banking
- Protection to money or deposits from exchange rate fluctuations
- No ceiling on the maximum amount of deposit in the account
- Balances in the RFC (D) accounts may be credited to NRE/FCNR (B) Account at the request of the account holders consequent upon change in their residential status from resident to non-resident
EEFC Accounts
The other type of foreign currency account permitted in respect of foreign nationals resident in India is the Exchange Earner’s Foreign Currency (EEFC) account. However, credits and debits to such accounts shall be in accordance with the conditions stipulated by the RBI. These accounts can be maintained by residents who happen to receive money from abroad in foreign currency as in the case of RFC (D) account.
They can be individuals or corporate entities such as individual exporters or exporting firms. However, normally, EEFC accounts are opened by exporters out of sale proceeds of exports. The EEFC account can be opened only out of foreign exchange earned, whereas an RFC account can be opened for residents other than exporters. One cannot open an EEFC account out of unspent foreign exchange taken for a foreign tour.
Further, only up to 50 per cent of the money received in foreign currency is allowed to be credited into the account and not the whole amount. The balance money can be exchanged for rupee. The Reserve Bank varies the percentage of money that can be put into EEFC accounts depending upon its policy from time to time.
Currently, the RBI permits big exporters, professionals and companies operating from Special Economic Zones (SEZs) such as Madras Export Processing Zone to credit 100 per cent of foreign exchange to credit into EEFC accounts. Funds held in EEFC accounts can be used by depositors for personal and business purposes as approved by RBI from time to time. Exporters can maintain this account only in the form of a current account.
The main advantage is that depositors can use funds for personal andbusiness purposes without buying foreign currency from banks at the ongoing market rate. The EEFC account of a resident can be held jointly with his close relative. However, this close relative will not be eligible to operate the account during the life time of the resident account holder. Exporters can avail trade-related loans/advances to overseas importers out of their EEFC balances without any upper limit.
They can also repay packing credit advances whether availed in rupee or in foreign currency from balances in their EEFC account or rupee resources to the extent exports have actually taken place. The purchase of foreign exchange from the market for refunding advance payments credited to accounts would be allowed only after utilising the entire balance in the exporter’s EEFC accounts maintained at different banks.
Diamond Dollar Account (DDA)
Diamond Dollar Accounts (DDA) can be opened by companies dealing in the purchase/sale of rough, cut or polished diamonds and diamond-studded jewellery. They must have a track record of at least three years in import or export of diamonds and an average annual turnover of ₹5,00,00,000 or above during the preceding three years (from April to March). However, not more than five Diamond Dollar accounts can be opened with banks.
Here it becomes important to discuss the concept of ACU dollar, Euro Account and CLS. Asian Clearing Union (ACU) was set up at Tehran, Iran on 9th December 1974 by the initiative of the United Nations Economic and Social Commission for Asia and Pacific (ESCAP) to promote greater regional cooperation. The original participants of the union were the central banks of Iran, India, Bangladesh, Nepal, Pakistan, and Sri Lanka.
Central Bank of Myanmar joined the union at a later date. The establishment of the union was a result of the increasing need of a multilateral clearing arrangement among countries in this region to facilitate trade among the regional countries. The union provides solution (albeit, partial) to two major problems related to payment in international trade faced by the Asian nations.
These problems are:
- Shortage of foreign exchange
- Non-convertibility of currencies
The union serves the following purposes:
- To provide a facility to settle, on a multilateral basis, payments for current international transactions among the territories of the participants.
- To promote the use of participants’ currencies in current transactions between their respective territories and thereby effect economies in the use of the participants’ exchange reserves
- To promote monetary co-operation among the participants and closer relations among the banking systems in their territories and thereby contribute to the expansion of trade and economic activity among the countries of the ESCAP region
- To promote currency swap arrangement among the participants so as to make Asian Monetary Units available to them temporarily.
The common unit of account of ACU is Asian Monetary Unit (AMU) denominated as ‘ACU Dollar’ and ‘ACU Euro’, equivalent to one USD and one euro respectively. All payment instruments are denominated in AMUs. AD category-I banks can make settlement for such instruments through operations on ACU dollar and ACU euro accounts. The main idea behind the settlement procedure of ACU is that a substantial part of the transaction is settled directly through the accounts maintained by AD Category-I banks with banks in the other participating countries and vice versa.
AD Category-I banks are permitted to settle commercial and other eligible transactions in the way other normal foreign exchange transactions are settled. The procedures for opening letters of credit, negotiation of documents, etc., in respect of trades in convertible currencies are also applicable for the trades conducted through the ACU mechanism. In order to facilitate these transactions, AD Category–I banks can open ACU dollar and ACU euro accounts with their branches/correspondents.
In addition, AD Category-I banks also need to ensure that at all times, the balance maintained in the ACU dollar and ACU euro accounts are sufficient to meet the requirements of their normal exchange business and funds rendered surplus. In the ACU mechanism, payments for export from India will be received by debit to the ACU dollar and ACU Euro accounts of the commercial banks of other participant countries maintained with ADs in India or by credit to the ACU dollar and ACU Euro accounts of ADs maintained with correspondent banks in the other participant countries. The reverse will be the case for imports into India from any of the ACU countries (except Nepal and Bhutan).
Continuous Linked Settlement (CLS)
It is launched in 2002, is a financial institution that provides cash settlement services to members of forex market. This helps in mitigating the settlement risk for foreign exchange transactions. CLS is owned by the World’s leading foreign exchange banks. CLS also streamlines the foreign exchange operations.
Similarities and Differences in NRE and NRO Accounts
Similarities between NRE and NRO accounts are as follows:
- Both accounts can be opened as savings as well as current accounts.
- Both accounts are in Indian Rupee accounts.
- An individual needs to maintain an average monthly balance of ₹75000 in both NRE and NRO accounts.
The differences between NRE and NRO accounts are shown in the following table:
| Points of Difference | NRE Account | NRO Account |
|---|---|---|
| Repatriation | NRE account is freely repatriable. | NRO account has restricted repatriability. |
| Tax Treatment | NRE account is taxfree. | The interest earned in NRO account and credit balances are subject to respective income tax bracket. |
| Deposit of Rupee funds generated in India | Deposit is not allowed in NRE account. | Deposit is allowed in NRE account. |
| Joint Holding | NRE account can be jointly held with another NRI but not with resident Indian. | NRO account can be held with NRI as well as resident Indian. |
