Proposal to reshape India's money-changing industry hits a roadblock

Central bank called for industry to have forex correspondents but there has been no progress

When the Reserve Bank of India (RBI) came out with a draft licensing framework for the foreign exchange business late last year a key proposal was to have a new category: Forex correspondents (FxCs). It would have changed the way retail forex is bought and sold by giving a fillip to a new franchisee model.

But there has been no progress.
 

The ‘draft licensing framework for authorised persons (APs)’ under the Foreign Exchange Management Act, 1999’ was received with much interest when it was released in December 2023. It was last reviewed almost two decades ago (in March 2006); and the changes were expected to chisel a new ecosystem. Other than FxCs, it would have also created integrated firms like travel agencies which could trade in forex and also issue travel cards. The RBI’s draft – had it been operational – would also have changed the business and made it more organised with higher governance standards.
 

Industry sources say the stumbling block is the fact that the principal authorised dealer (AD-II) is to formulate a policy for engaging FxCs with the approval of its board. The policy could be about eligibility criteria, net worth, due diligence and grievance redressal mechanism. (AD-IIs are non-bank entities and can carry out specified non-trade related current account transactions). And this is the relatively easier part. What is not is that the “principal AD-II shall be responsible to ensure that the FxC adheres to rules and regulations governing forex transactions under FEMA”.
 

“The scheme would have widened the footprint of retail money changing with many more outlets in a franchisee model. Of course, on-boarding diligence will be those doing it,” says Parag Mehta, managing partner, F R Ratnakar & Co (FRR & Co). This last aspect is a key tipping point.
 

Despite the billions of dollars it handles, the money-changing industry is largely faceless. Many of the early entrants had their roots in the old-world forex brokerage business targeted at banks. There’s been a shakeout here as well, with only 15 of them active now, down from the 40-odd a few years ago (it was 125 in 1998). Five – Kanji Pitamber, FRR & Co, Vrijlal Thakar & Co, Govindram & Sons, and Mecklai & Mecklai – control 75 per cent of the volumes.
 

And unlike other parts of the financial world, the forex business is far more complicated. On-boarding FxCs calls for far more diligence than in the case of business correspondents for financial inclusion. And in any case, the central bank has been taking a closer look at outsourcing arrangements of its regulated entities. Companies in the money-changing business are sensitive to the fact that any falling short of standards may also attract the attention of law enforcement agencies .
 

“Many of the nearly 1,700 money changers would have vanished. The newer players would have used technology even though in our industry the brick-and-mortar model should be followed to keep controls and checks,” says Rajneesh Bansal, managing director, Paul Merchants. It’s an indirect way of putting it across that this is a sensitive trade; and not many will utter the word hawala.
 

Bhaskar Rao, managing director of Orient Exchange (India), feels the role and responsibility of AD-IIs and FxCs has to be defined more precisely. “In the absence of such clarity, AD-IIs may find it very difficult to accept the FxC model. It may meet the same fate as the franchisee model which replaced restricted money changers over two decades ago.”
 

When the RBI’s draft was released, it was said the stage was set for integrated players: Those offering tourism-related services, forex and cards. Like Thomas Ebix which purchased the Centrum Group’s forex business, Centrum Direct, for Rs 1,300 crore in 2018. Centrum Direct was into overseas remittances, prepaid travel cards and traveller’s cheques. It partnered tuition-fee payment aggregators for processing outward remittances.
 

Outside of money-changing, you had TripMoney – an arm of MakeMyTrip – which bought a majority stake in BookMyForex, an online foreign exchange services provider. In the forex brokerage business, the last deal among voice-brokers (they use telephone for trade) was in May 2018, when Crest Ventures purchased the 48 per cent stake held by Prebon Holdings BV in Tullett Prebon (India) for Rs 4.52 crore. There may simply be no takers for monoline businesses here on.

Seeking reform
 

 Framework on foreign exchange was last reviewed in March 2006

 RBI in 2023 proposed a new category of money changers

 Franchisee model would reshape the way retail forex is handled

 Aim was to have integrated firms offering tourism services, forex

 New investments were expected to flow in a largely faceless business