How will Bangladesh's new cross-border trade settlement in taka work?

Bangladesh's central bank has introduced a new framework allowing eligible cross-border trade payments to be settled in taka through Non-Resident Taka, or vostro, accounts maintained by authorised dealer (AD) banks for correspondent banks in trading partner countries.

Vostro accounts are not new. Under the existing system, AD banks could open taka vostro accounts for their overseas branches and correspondent banks against inward remittances in freely convertible foreign currencies.

The new arrangement changes how these accounts can be funded and used. Eligible import payments can now create taka balances in vostro accounts without an initial inward remittance in a freely convertible currency. These balances can then be used to settle eligible export payments and for other permitted purposes.

So, how will the new taka settlement framework work? Here are the key terms and the process in simple terms.

What is a vostro account?

In simple terms, it means a foreign bank can keep a taka account with a Bangladeshi bank and use the money in that account to make or receive payments related to trade with Bangladesh. For example, suppose a bank in India maintains a taka account with a Bangladeshi bank. For the Bangladeshi bank, it is a 'vostro' account. The word 'vostro' is Latin for "yours", meaning "your account with us".

The foreign bank owns the money, but the account is maintained by the Bangladeshi bank. Bangladesh Bank's guidance describes a vostro account as an account maintained by a domestic bank in the name of a foreign bank, overseas branch or correspondent bank to facilitate local-currency transactions and settlements.

What is a correspondent bank?

A correspondent bank is a bank that provides banking services to another bank, particularly when the latter does not have its own banking presence in a country. For example, a UK bank may not have a branch in Bangladesh. It can maintain a relationship with a Bangladeshi bank, which can hold its taka account and process eligible payments on its behalf.

BB allows cross-border trade settlement in taka through vostro accounts

In this arrangement, the Bangladeshi bank acts as the correspondent bank.

So, in simple terms, a correspondent bank is a local bank that helps a foreign bank conduct banking and payment transactions in a country where it does not have its own full banking presence.

What is an authorised dealer, or AD, bank?

An authorised dealer (AD) bank is a bank authorised by Bangladesh Bank to conduct foreign-exchange transactions. The new framework says these AD banks can maintain Non-Resident Taka vostro accounts for correspondent banks in trading partner countries.

How will a trade payment work?

Suppose a Bangladeshi company exports garments to a US buyer worth $1 million. The new arrangement does not mean that the exporter and importer have to rewrite the contract in taka. The letter of credit (LC), contract and invoice can continue to be denominated in US dollars or another freely convertible or admissible currency.

But when the payment is settled through the taka vostro account, the invoiced amount will be converted into taka at the prevailing exchange rate.

For example, if the applicable exchange rate is $1 = Tk120, a $1 million invoice would be settled at its taka equivalent of Tk12 crore.

What happens if money is left in the vostro account?

This is another important part of the new arrangement. Suppose a foreign bank has Tk50 crore in its taka vostro account. After making eligible payments, Tk10 crore remains. That Tk10 crore is the surplus balance. 

Bangladesh Bank now allows such surplus taka, subject to prevailing regulations, to be used for certain permitted investments in Bangladesh. These include: foreign direct investment (FDI), foreign portfolio investment (FPI), alternative investment funds, open-end mutual funds.

Will exporters lose their foreign-currency facility if they are paid in taka?

No. Bangladesh Bank says exporters receiving proceeds in taka under this arrangement will remain eligible for foreign-currency retention facilities, where applicable. This is important because exporters may need foreign currency to pay for imported inputs or repay eligible Export Development Fund (EDF) loans.

What is a nostro account?

Nostro is essentially the opposite perspective of vostro. If a Bangladeshi bank keeps a foreign-currency account with a bank in another country, that is its nostro account – Latin for "ours", meaning "our account with you".

For example, if a Bangladeshi bank keeps a US-dollar account with a US bank, the Bangladeshi bank calls it its nostro account.

What is the benefit of the new system?

The main change is that Bangladesh is creating another route for settling eligible international trade transactions.

Instead of requiring every trade payment to be settled through a foreign currency such as the US dollar, suitable trading partners can use a taka-based mechanism through vostro accounts.

This could make cross-border settlement more flexible and increase the use of taka in bilateral trade.

The ability to use surplus taka for permitted investment also gives foreign banks and their customers an additional use for taka balances accumulated through trade.