Indian Bank has received the Reserve Bank of India (RBI) regulatory approval to hold special rupee vostro accounts of three banks from Sri Lanka. The lenders are struggling against serious foreign exchange crunch, according to a report by business daily Economic Times.
The Chennai-headquartered public sector bank, which has had a long presence in the South Asian island nation, is expected to activate the special vostro accounts in about a week.
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A vostro account in local currency would allow Sri Lanka to import from India without dipping into its declining dollar supply. The INR vostro facility is part of the special trade settlement mechanism finalised by the RBI in July 2022.
The arrangement allows Indian importers to deposit rupees in vostro accounts that overseas banks open with banks in India and clearing of dues to Indian exporters from the surplus balances in the vostro accounts.
“The RBI has given permission for three vostros. The accounts are expected to be functional any day now,” a source told Economic Times.
The INR vostro account is considered as a tool to either overcome restrictions in the wake of US sanctions on Russian banks or continue cross-border trades amid a hard currency crisis.
The vostro accounts would also help Sri Lanka to utilise the rupee lines extended by India. It would contribute towards stabilising the Lankan economy, according to a banker.
Sri Lanka President Ranil Wickremesinghe recently said that 2023 would be a “critical year” for the troubled country battling against economic distress.
Indian Bank opened its first overseas branch in Colombo in 1932. Till now, State of India (SBI) is the other domestic institution with which a Sri Lankan bank has opened a vostro account.
As the currency market in Sri Lanka ran out of dollars, early last year most banks in India virtually stopped discounting letters of credit (LC) issued by banks in Lanka, as per the report.
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