On Saturday, the RBI unveiled a three-pronged strategy to arrest the rupee's slide. While the measures helped the currency, banks got nervous about operational challenges and costs. "There will be challenges for banks because the requirement has to be implemented at the system level," said a source familiar with discussions.
But while the central bank's intervention brought cheer to the currency market, it made banks and forex dealers nervous due to stringent rules. According to sources, they have now approached the RBI seeking relaxation of some provisions, greater clarity on their implementation and more time to comply.
On Saturday, the RBI unveiled a three-pronged strategy to arrest the rupee's slide. It opened a special dollar window for state-owned oil marketing companies (OMCs), tightened restrictions on foreign exchange derivatives and imposed additional reserve requirements on banks.
While the measures helped ease pressure on the rupee, the last two have raised concerns among banks over operational challenges, higher costs and the impact on liquidity.
The main worry is the requirement that banks maintain a foreign exchange risk reserve (FERR) with the RBI equivalent to 20% of the rupee value of the notional amount for each qualifying transaction exceeding $2 million.
Bankers say the provision could lock up substantial funds while forcing lenders to make significant changes to their systems at short notice.
"There will be challenges for banks because the requirement has to be implemented at the system level. These changes cannot be made overnight," said a source familiar with the discussions.
The concerns have been conveyed to the RBI by banks and the Foreign Exchange Dealers' Association of India (FEDAI). "We are expecting some FAQs today or tomorrow," the source added.
Further banks are still unclear about the accounting treatment of the reserve and the timing of deposits with the central bank.
"Banks do not know whether a separate account needs to be maintained or whether the RBI will create a specific reserve account," the source said.
Another issue is whether the reserve must be deposited when the contract is entered into or when the first leg of the transaction is executed.
Bankers are also worried about who will bear the additional cost of complying with the new requirement and have sought clarification whether they can collect the reserve amount upfront from customers or must deploy their own funds and subsequently recover the cost.
"Should we collect the money from customers and deposit it with the RBI? Or should banks fund the reserve themselves and pass on the additional cost to customers? We need clarity on which approach to follow," said the treasury head of a private sector bank.
The distinction is significant because the reserve requirement could increase the cost of hedging for businesses already grappling with currency volatility.
A treasury head at a state-owned bank said lenders were awaiting clarity on reporting requirements, including whether the reserve position would have to be reported to the RBI daily.
According to a Bloomberg report, banks have also sought a postponement of the implementation deadline to give them time to modify their systems and adjust their operations.