- Anoop Nair, Head of Country - India
Decoding Liberalised Remittance Scheme
Liberalised Remittance Scheme (LRS) is a Reserve Bank of India (RBI) regulation that allows an Indian resident to send money offshore for various purposes as defined in the regulations.
LRS, its origins & rationale
Indian economy has gone through a metamorphosis in the last two decades some affecting negatively & some positively. But today, from policy support to capital, India has everything going for it. That said, we are still a capital starved country owing to sheer size of the opportunity, scale of distribution & a cautionary policy stance. However, we are still known as one of the world’s most carefully built rising star that withstood various black-swan events and did not turn upside down. Full credit goes to the cautionary approach, perhaps.
Back to LRS. Up until 2004, Indian residents wanting to send money offshore had to take specific written permission from the regulator. This was a currency control restriction because Rupee was not fully or partially convertible (a brief explanation on convertibility & what it means coming up shortly). With the country extensively reliant on Imports, the regulator wanted to control the retail outflows by placing restrictions fearing devaluation risks.
But India’s growth post 2004 was magnificent to say the least. There was a wave of policy support along with government grants that fuelled the export, manufacturing & merchanting market with Indian exports setting up long term trade contracts both in services & good. Our currency reserves started rising & the RBI was slowly and steadily getting less worried about retail outward remittances (rupee converted into foreign currency for non-asset creation activities). It still frowned upon & mainly declined Indians buying assets (equity, real estate etc) offshore with a view to drive capital investments in the country as against offshore markets.
Things have changed since 2004 but LRS continues to be restricted. Look at the overall value that one can remit and how it has evolved (Fig 1). As of today, an Indian resident can remit up to $250,000 per year for purposes as allowed by Reserve Bank of India.
Source: Reserve Bank of India Fig 1
Today, LRS with the same regulatory narrative has become a prominent channel for wealth diversification & discretionary spending. Amongst many factors that contributed to the prominence of LRS, digitization led by the pandemic has had a compounding impact. There’s a general consensus that banking must become borderless and moving money within your own accounts one-shore or off-shore shouldn’t be that difficult as long as one is within the regulatory ambit.
Purpose Codes – What is allowed & What is not
Most regulators in capital-controlled economies will give you a negative list (what they think you shouldn’t do) and everything else is broadly permitted. India has been taking a slightly more conservative approach by defining a positive list of what is permissible & everything else as far as outward remittances are concerned is not allowed. RBI has prescribed purpose codes that are in two broad categories:
a) Capital Account Remittances
a. These are remittances that either create an asset or liability offshore
b. This means any investments, loans or even parking funds offshore is considered capital movement (rightly so!)
b) Current Account Remittances
a. All those use cases where assets & liabilities are not affected.
b. This means Student Tuition Fee, Maintenance of a family member, Travel & Leisure, Medical Tourism, Emigration etc
Please see Fig 2 & 3 as representation of the purpose codes. A full current list of the purpose code can be found by a simple Google Search.
Source: Reserve Bank of India Fig 1 & Fig2
A Was-Is on how LRS has changed in the recent past
If you are a millennial, you probably won’t know what a bank branch looks like. Banking in the recent past has been a healthy victim of the wave of digitization in this country. With the onset of FinTech in India, there has been a sea change in the way cross border payments happen in the country (blog on Payment landscape in India shortly). In the erstwhile days, one had to go to the branch and provide physical documents to transfer funds abroad for both capital & current account purposes.
Cut to scene, today you download an app, supply your authentication, upload documents & viola you are ready to make the payment. Some platforms provide you with an option to choose rates too. You probably didn’t move from your chair let alone go to a branch.
The speed of digitization along with a willing regulator is fuelling a paperless banking ecosystem. While the regulator is all for going digital, it still has some concerns about capital flows going out of the country and thus likely that restrictions will continue in its current form. Having said that owing to the innovation within the LRS and broadly cross border banking the percentage of the population using LRS will likely increase. We are a nation of 1.3B people out of which perhaps only <1% use the LRS product. India remitted close to $20b under LRS last year. That’s an average ticket size of $1500 per person. There’s plenty of room and appetite as far as Indian residents are concerned.
What will drive this utilisation? A cross border banking proposition that allows seamless remittances within the ambit of the law, will see greater utilisation of the limits.
So what does the future look like with the evolving technology landscape:
While we are not in the business of foretelling but the writing, on some of these aspects, is certainly on the wall:
Cross Border banking is set to be disrupted with a huge focus on ambitious businesses & individuals that drive them
Borderless banking is a new theme in the country and LRS will continue to play a pivotal role here. RBI in its recent Annual Report & multiple other papers have explicitly mentioned the need to better processes that can enable ease of making payments (and they still are tight lipped on increasing limits! Surprise Surprise)
Cross Border FinTechs will actively look at providing a seamless banking alternative to deserving & demanding population in the country that’s looking at diversification as a theme.
At Interpolitan, we are dedicated to India corridor and are building a borderless alternative banking experience for Indian Residents. Connect & watch this space for more.
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