Forex license conundrum: RBI’s window of opportunity is here

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While the GST has gone a long way in regularizing taxation and billing process across the industry, the impact on revenues has been downward, especially for the SMEs from industries such as garment, pharmaceuticals, leather etc. As a consequence, foreign exchange requirements from Industry has fallen drastically, making the forex market even more competitive. This has had the two-fold effect of reduction in total turnover, as well as erosion of profit margins.

The situation is not likely to ameliorate in the medium term, but as is always the case , this challenge also carries the seeds of an opportunity.

For quite some time now, the RBI has mandated a 25 Lakhs Net Owned Fund (NOF),   dedicated entirely to business, to issue a single branch license. The NOF has to be 50 Lakhs for a Unified Branch License for Full-Fledged Money Changers to operate multiple branches across the country. Owing to a robust growth trajectory of the Indian economy, inflationary trends, and devaluation of the rupee, these limits have long ceased to be a barrier to entry. This has resulted in the entry of a number of fly-by-night operators for short-term gains, with very little knowledge of the forex business and scant respect for rules and regulation.

On the other side of the spectrum, The Authorised Dealers 2 (AD-2) license is issued to Forex companies with a whopping NOF of 10 Crores, turning the AD-2 remittance busines into an exclusive club of big players.

Over a period of time this disparity in licensing has led to a huge gulf in the quality and intent of service in the forex industry. Amongst other ramifications, this has also led to a dearth of trained manpower and begs the question – is the forex industry growing in the right direction?

The RBI would do well to revisit these limits. To my mind, the Single Branch License should be increased to 1 Crore, with a commensurate increase in Unified Branch License. This will bring the industry closer to the median, and ensure a certain standard of service across the board. At the higher end of the spectrum, The AD2 license NOF fund should be relaxed to 5 Cr, bringing more well-heeled companies into the business of remmitance and allowing customers greater choice.

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