Banks will bear significant new responsibilities for cross-border payment transactions effective October 1. According to The Economic Times, they are now required to confirm the validity of service contracts and foreign entities involved, track export revenues, and handle overdue export bills. This represents a fundamental shift from the previous system where banks could refer suspicious cases to the Reserve Bank of India or check against the regulator's caution list. The new framework creates a challenging landscape in service imports and exports aimed at curbing money laundering and suspicious trading practices.
Under the new framework, banks must use their discretion in clearing payments, verify whether service contracts and overseas parties are genuine, and certify payments. As reported by The Economic Times, banks will also decide whether to block or give leniency to companies whose export bills are overdue, and determine if third-party payments where goods are imported but payment comes from another country are legitimate. A senior banker expressed concern about potential exposure to the Enforcement Directorate if wrong decisions are made in good faith, stating "We are not in the business of investigating. How do we know for certain that a service for which payment has been either made or received has actually been delivered?"
There are concerns about potential regulatory arbitrage as some banks may lower compliance standards to accommodate suspect clients. According to The Economic Times, there are expectations that companies will identify banks that don't ask many questions, creating a competitive disadvantage for compliant institutions. A senior banker noted that "There would be companies spotting banks that don't ask too many questions. Banks have in touch with FEDAI (the industry body) which has given its guidance in certain situations," while emphasizing the need for common standards to minimize regulatory arbitrage.
Under the new regime, banks will decide on advance payments and letters of credit based on commercial considerations rather than RBI caution lists. As reported by The Economic Times, banks can waive bank guarantee requirements for advance remittances up to $5 million if satisfied with the importer's track record. For imports, banks previously required bank guarantees for advance remittances, but now have discretion not to insist on guarantees above this limit. The framework shifts from the previous system where banks insisted on advance payments and letters of credit from exporters in RBI caution-list to a more discretionary approach based on client assessment.
Trade finance experts suggest potential risk mitigation through enhanced verification systems, including giving banks access to GSTN to verify invoices and tax declarations. According to The Economic Times, banks must establish systems to monitor and follow up with exporters to realize export proceeds. A trade finance expert noted that "One thought on possible risk mitigation linked to the reporting of services by banks is giving banks access to GSTN to verify invoices and value declared to tax authorities being consistent with what is declared to the bank. This gives a third party verification akin to how Customs assesses the value of goods imported and exported." The transition must be handled carefully to ensure compliance effectiveness while allowing RBI to focus on systemic issues.
