Hidden Charges On Foreign Exchange Transactions Will Soon Be Disclosed In Advance

People making international payments often realise the real cost of a transaction only after it is completed. This is common for payments related to education, overseas living expenses, travel, or foreign investments. In most cases, customers are shown only the exchange rate at the time of the transaction, while other charges become visible later.

These extra charges may involve the remittance fee, the charge for currency conversion, and deductions by intermediary banks. Since these charges are not upfront, customers find it difficult to pre-determine the total cost of the transaction in question. This transparency in charges has led cross-border payments to appear more expensive and complicated compared to domestic transfers.

The Reserve Bank of India (RBI) has circulated a draft proposal aimed at bringing in better transparency in foreign exchange transactions. It asked all customers to know the complete cost of a transaction before entering into it.

What the RBI Has Proposed On Forex Transaction Costs

The draft circular stipulates that under this initiative, banks and financial institutions classified as Authorised Dealers will have to disclose the total transaction cost. This means all applicable charges must be shared with the customer before the transaction is confirmed.

The proposal covers three of the most common foreign exchange transactions. These include cash transactions, where currencies are exchanged on the same day, commonly referred to as T+0 (trade+0). It also covers tom transactions, which settle on the next business day, otherwise called T+1, and spot contracts, which are settled within two business days following the trade date, or T+2.

For these transactions, Authorised Dealers are required to disclose the applicable exchange rate and all charges associated with the execution of the transaction in advance of the customer's agreement to the deal, and this must also be reflected in the deal confirmation.

Earlier Measures To Improve Pricing Transparency

The central bank has taken steps previously to enhance transparency in foreign exchange pricing. In January 2024, Authorised Dealers were required to disclose the mid-market rate along with the bid and ask prices for foreign exchange derivative contracts and foreign currency interest rate derivative contracts offered to retail users.

This information had to be disclosed pre-trade and was to be part of the deal confirmation or term sheet. Publishing the mid-market rate assisted clients in understanding the current market price and the margin applied by the dealer. The proposed new draft moves from this foundation and expands similar disclosure obligations to a broader range of foreign exchange transactions.

What Does The Total Transaction Cost Comprise Of

The draft circular requires the Authorised Dealer to provide a full breakdown of all costs constituting a foreign exchange transaction.

The total transaction cost comprises the foreign exchange rate applied and charges for currency conversion. It also includes sending fees, such as outward remittance charges. Receiving fees, in respect to fees charged by the beneficiary's bank, are applicable under certain conditions, and disclosure is required where applicable.

All charges by intermediary or correspondent banks that are involved in routing the payment must also be included. These fees come because a lot of payments pass through one or more banks before reaching the final recipient. Any other fee or cost linked to executing the transaction will form part of the total disclosed cost.

RBI has stipulated that this information should be provided beforehand and also forms part of the contract note/deal confirmation so that the customer can cross-check the charges levied.

Problems Faced By Retail Users In Forex Transactions

Retail users have faced challenges in making international payments. In sharp contrast to domestic transfers, cross-border transactions are often accompanied by higher costs and limited clarity on pricing.

Moreover, a customer is usually only presented with an exchange rate; other charges, like remittance fees, conversion charges, and intermediary bank fees, are either combined into the rate or deducted later. In all such cases, it becomes difficult to analyse the exact cost of the deal during the time of its initiation.

Most of the time, banks incorporate a number of charges into the quoted exchange rate itself. These include foreign exchange margins, currency conversion charges, and processing fees.

There has also been limited transparency around the pricing of cash, tom, spot, and derivative transactions. Without access to mid-market rates, retail users have found it difficult to assess whether the spreads quoted are reasonable.

On the recipient side, other deductions in the form of short realisation fees or arrangements where charges are to be borne by the beneficiary instead of the remitter have reduced the final amount received. Other opaque costs have been the correspondent bank fee per transaction.

Timeline For Feedback And Implementation

The proposed new disclosure requirements are expected to be applicable three months from the date of issuance of final instructions. Comments on the draft circular can be submitted until January 9, 2026.

Who Are Authorised Dealers And Retail Users

Authorised Dealers are banks and financial institutions designated by the RBI to deal in foreign exchange. Retail users are customers who do not qualify as non-retail as per the criteria specified in the extant directions.