Cross-border remittances refer to the transfer of funds between individuals or entities across national borders. These remittances are particularly significant for low- and middle-income countries, where they serve as a vital source of income and foreign exchange. Read here to learn more.
India is strongly pursuing its proposal for lowering the cost of cross-border remittances, which it made at the largely inconclusive WTO’s 13th Ministerial Conference in Abu Dhabi, and has now asked the multilateral body’s general council (GC) to initiate a work programme to make recommendations for the same.
The National Payments Corporation of India is working on a presentation for a session on ‘cost of remittances’ being held by the WTO’s committee on trade in financial services in Geneva on March 25, 2024, drawing from its experience of putting in place a robust physical as well as electronic payment and settlements systems in the country.
Cross-border remittances
Economic Importance:
- Poverty Alleviation: Remittances contribute significantly to household income in developing countries, helping families meet basic needs such as food, education, and healthcare.
- Foreign Exchange Reserves: Countries like India, Mexico, and the Philippines heavily depend on remittances for foreign currency reserves. In India, for example, remittances from expatriates hit record highs, with the World Bank estimating $100 billion received in 2022.
- Economic Stability: Cross-border remittances play a stabilizing role during economic downturns by providing a steady inflow of funds that offset reductions in foreign direct investment or trade revenue.
Channels of Transfer:
- Formal Channels: Banks, money transfer operators (MTOs) like Western Union, and digital platforms (e.g., PayPal, Remitly) are commonly used formal channels.
- Informal Channels: Hawala systems or unregulated brokers are also used in regions with less developed financial systems, though these methods raise concerns about transparency, regulation, and security.
Challenges
- High Transaction Costs: Transferring money across borders can be expensive, especially when using traditional methods. The World Bank reports that the global average cost of remitting $200 is around 6%, well above the 3% target set in the UN’s Sustainable Development Goals (SDGs).
- Regulatory and Compliance Barriers: International anti-money laundering (AML) regulations and know-your-customer (KYC) requirements add complexity and can delay the remittance process, especially for small-scale remittances.
- Exchange Rate Fluctuations: Cross-border remittances are vulnerable to currency exchange rates, affecting the amount received in the destination country.
Technology’s Role
- Blockchain and Cryptocurrencies: Blockchain-based platforms and cryptocurrencies are emerging as innovative solutions that promise faster and cheaper cross-border transfers, but they face regulatory hurdles and scepticism over volatility.
- Fintech Companies: Platforms like TransferWise (now Wise) and Revolut are revolutionizing remittances by offering lower fees and faster services using advanced digital platforms.
Policy and Regulation
- International Cooperation: Organizations like the World Bank and the International Monetary Fund (IMF) have been working with national governments to improve the remittance landscape by reducing transaction costs and improving transparency.
- Financial Inclusion: Efforts are being made globally to include remittance recipients in formal banking systems, thereby encouraging savings, investments, and better financial management.
Why is India pursuing lowering the cost of cross-border remittances at WTO?
India’s push to lower cross-border remittance costs at the World Trade Organization (WTO) is driven by several key factors:
High Volume of Remittances:
- India is the world’s largest recipient of remittances, with Indians working abroad sending over $100 billion annually.
- These funds play a crucial role in the Indian economy, especially in supporting the livelihoods of families in rural areas.
- Reducing the cost of remitting funds helps maximize the benefits to recipients.
High Remittance Costs:
- The cost of sending remittances, particularly to developing countries like India, remains high compared to the global target of reducing remittance fees to under 3%.
- The global average is around 6%, with some regions facing costs as high as 10%.
- Lowering these costs would result in significant savings for Indian expatriates, who could send more money home for the same amount.
Supporting Financial Inclusion:
- Lower remittance fees align with India’s broader goals of promoting financial inclusion.
- Cheaper remittance services can encourage more people, especially in rural and underbanked areas, to use formal financial channels, fostering greater economic participation.
Economic Impact:
- Reducing the cost of cross-border remittances can have a positive macroeconomic impact.
- Increased remittances translate to higher disposable incomes for families, which can boost consumption, savings, and investments in education and healthcare, further strengthening India’s domestic economy.
Digital and Financial Reforms:
- India has been at the forefront of digital financial inclusion, with programs like Unified Payments Interface (UPI) and Aadhaar-enabled payment systems.
- By advocating for lower remittance costs at the WTO, India seeks to leverage these advancements and integrate them into global payment systems to enhance cross-border remittance flows at lower costs.
Global Development Goals:
- Reducing remittance costs aligns with the United Nations Sustainable Development Goals (SDGs), specifically target 10.c, which aims to reduce the transaction costs of remittances to less than 3% by 2030.
- India’s advocacy at the WTO helps to reinforce global efforts in achieving these objectives.
Conclusion
Cross-border remittances are a vital financial flow with significant implications for global economic stability, particularly in developing countries. However, challenges such as high costs, regulatory compliance, and the need for better infrastructure remain obstacles to fully unlocking their potential.
Lowering costs of remittances would mostly benefit low and middle-income countries that accounted for 78 per cent of remittances flow in 2023, per estimates.
Frequently Asked Questions (FAQs)
Q. What are examples of cross-border remittances?
- Bank transfers.
- International wire transfers.
- Electronic funds transfers.
- Credit card payments.
- Debit card payments.
- Prepaid debit card payments.
- Global ACH payments.
- Digital currencies.
Q. Which country has the highest cross-border remittances to India?
Ans: UAE has the highest remittance followed by the US, Saudi Arabia and Kuwait.
Q. What is the limit of cross-border remittance?
Ans: Current Limits on Outward Remittance from India: Under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI), resident individuals can remit up to USD 250,000 per financial year (April – March) for permissible current or capital account transactions or a combination of both.
Related articles:
-Article by Swathi Satish
Leave a Reply