RBI permits SPDs to borrow in foreign currency

The central bank specified that they can use overdraft facilities in nostro accounts exclusively for operational purposes.

Nostro accounts are bank accounts held by a domestic bank in another country, denominated in the currency of that foreign country.

For instance, an SPD engaged in transactions involving euros would open an account with a bank in the European Union to facilitate settlement operations.

The RBI has expanded the regulatory framework to include standalone primary dealers (SPDs) concerning risk management and inter-bank transactions, thereby permitting their involvement in foreign exchange products.

Since 2018, SPDs have been authorised to offer forex products to clients, including foreign portfolio investors, and are categorised as Authorised Dealer Category-III. Their engagement in forex products constitutes part of their non-core activities.

Borrowings by SPDs must comply with prescribed foreign currency limits. Any excess withdrawals not reconciled within five days must be promptly reported to the RBI, with such reporting required within 15 days from the end of the month in which the limits were exceeded.

However, reporting is not mandatory if arrangements are in place for value dating, as stated by the Reserve Bank.

According to RBI data, funds raised by SPDs surged by 44.4% year-on-year in 2022-23. Borrowings remained the primary source of their funding at 90.3% of the total funds raised.