What changed
RBI observed that exporters with low turnover were receiving large export advances in low-interest currencies against domestic bank guarantees, depositing them in INR for arbitrage. Guarantees were issued before advance receipt, at par value, and exporters were booking forward contracts without export performance. RBI reiterated that guarantees must facilitate genuine exports, not speculative capital flows, and advised banks to exercise caution.
What it means for you
Banks must tighten due diligence on export advance guarantees, verifying exporter track record and ability to execute orders. Guarantees cannot be used for interest rate or currency arbitrage. Non-compliance with FEMA regulations could expose banks to foreign exchange risk and regulatory action.
What you must do
- Conduct thorough due diligence on exporters' track record and export capability before issuing guarantees against export advances.
- Ensure that guarantees are not used for interest rate or currency arbitrage and comply with FEMA regulations.
- Verify that export advances received by exporters are in compliance with FEMA regulations.
- Monitor forward contract bookings to prevent free booking/cancellation without crystallized exports.
- Assess and mitigate foreign exchange risk from open currency positions in such transactions.
Who it affects
Scheduled commercial banks (excluding RRBs), Exporters receiving large export advances, Bank guarantee and trade finance departments, Forex and treasury operations teams
What specific risks does RBI highlight in this circular?
RBI flags risks of interest rate arbitrage, forex exposure from open currency positions, and potential FEMA violations when guarantees are issued for non-export purposes.
Are banks allowed to issue guarantees before receiving export advances?
No, RBI advises caution and implies guarantees should not be issued before advance receipt; the circular notes such practices were observed and are problematic.
What should banks check before issuing a guarantee for export advances?
Banks must verify the exporter's track record, ability to execute large export orders, and ensure the advance complies with FEMA regulations.