A customer walks into an urban co-operative bank in Pune to send Rs 2 lakh to her son studying in Canada. A simple remittance under the Liberalised Remittance Scheme. Behind that one transaction, three regulatory frameworks activate simultaneously — and the bank must comply with all three or face penalties under three separate statutes.
This article maps what happens when a UCB handles a foreign exchange transaction, tracing the compliance obligations through the KYC/AML framework, the FEMA authorised dealer framework, and the co-operative bank prudential norms.
Stack 1: The FEMA Framework — Can the Bank Do This at All?
AD Category
Not every co-operative bank can handle forex. The March 2006 AD categorisation RBI/2005-06/314 placed UCBs in AD Category I — the same category as commercial banks, with authority for all current and capital account transactions.
But in practice, most UCBs operate limited forex services. The four-tier structure:
| Category | Who | Forex Authority |
|---|---|---|
| AD Category I | Commercial banks, state co-op banks, UCBs | Full current + capital account |
| AD Category II | Upgraded FFMCs, select co-ops, select RRBs | Non-trade current account only |
| AD Category III | Select financial institutions | Incidental forex only |
| FFMC | Standalone money changers | Buy/sell for travel only |
A UCB handling an LRS remittance must be AD Category I. If it's AD Category II, it can sell forex for travel but cannot process a student remittance that exceeds travel purpose.
LRS Compliance
The remittance must be within the $250,000 annual limit RBI/2014-15/620:
"AD banks may now allow remittances by a resident individual up to USD 250,000 per financial year for any permitted current or capital account transaction." Rationalisation under LRS for Current and Capital Account Tr...
The bank must verify that the customer's total LRS remittances across all banks in the financial year don't exceed this limit. Since there's no centralized LRS tracking system, this relies on the customer's self-declaration and the bank's internal records.
Reporting
Under the Reporting Master Direction (Master Direction – Reporting under Foreign Exchang):
"Accurate compilations and timely submission of these reports are of critical importance as they not only act as a supervisory tool but also help in fine-tuning the policies." Master Direction – Reporting under Foreign Exchange Manageme...
The transaction must be reported in the bank's FETERS return under the appropriate purpose code.
Stack 2: The KYC/AML Framework — Who Is This Customer?
Customer Due Diligence
Before processing the remittance, the bank must complete CDD under the UCB KYC Directions 2025 (Reserve Bank of India (Urban Co-operative Banks –):
- Verify identity through OVDs (passport, Aadhaar, PAN, voter ID)
- Verify address
- Establish the purpose of the remittance
- Determine risk category (low/medium/high)
- Screen against UNSC sanctions lists — mandatory daily screening since the 2016 Master Direction:
"The UNSC Sanctions Lists shall be verified on daily basis and any modifications shall be taken into account by the REs for meticulous compliance." (RBI_11566, Para 51)
PAN and Form 60
For remittances above Rs 50,000, PAN or Form 60 is mandatory. The May 2019 Aadhaar amendment RBI/2018-19/190:
"For existing bank account holders, PAN or Form No. 60 is to be submitted within such timelines as may be notified by the Government, failing which account shall be subject to temporary ceasing." Amendment to Master Direction (MD) on KYC
STR Obligation
If the remittance raises suspicion — unusual amount, unusual frequency, inconsistent with the customer's known profile — the bank must file an STR with FIU-IND:
"A transaction which gives rise to a reasonable ground of suspicion that it may involve proceeds of an offence, regardless of the value involved; or appears to be made in circumstances of unusual or unjustified complexity; or appears to not have economic rationale or bona-fide purpose." (RBI_11566, Para 3(a)(xix))
The FATF Dimension
If the remittance is going to a jurisdiction identified by FATF as having strategic AML/CFT deficiencies, enhanced due diligence is required. The bank must apply additional scrutiny — source of funds verification, senior management approval, enhanced monitoring. The FATF compliance chain (covered in the FATF article) feeds directly into this operational decision.
Stack 3: The Co-operative Bank Prudential Framework — Can the Bank Afford This?
Forex Exposure and Capital
The remittance creates a forex exposure for the bank. If the bank is selling dollars from its own position (rather than buying cover in the inter-bank market simultaneously), it has an open position that must be within its risk limits.
The Risk Management Master Direction RBI/2014-15/533 governs how much open position an AD can carry.
Inter-bank Limits
If the UCB needs to buy dollars from another bank to fund the remittance, the inter-bank exposure limits apply:
"The total amount of deposits placed by a UCB with other banks for all purposes shall not exceed 20% of its total deposit liabilities." Placement of deposits with other banks by primary (urban) co...
"Deposits with any single bank should not exceed 5% of the depositing bank's total deposit liabilities." Placement of deposits with other banks by primary (urban) co...
For a small UCB with Rs 500 crore in deposits, the single-counterparty limit is Rs 25 crore. If its nostro account with a correspondent bank already has Rs 24 crore in exposure, a large remittance could push it over the limit.
Capital Adequacy Impact
Forex transactions carry market risk. The capital adequacy framework under the UCB Capital Adequacy Directions (Reserve Bank of India (Urban Co-operative Banks –) requires the bank to hold capital against this risk. The CRAR calculation includes market risk for forex positions.
A Tier 1 UCB (deposits under Rs 100 crore) must maintain 9% CRAR. A Tier 2+ UCB must maintain 12%. Every forex position consumes capital.
The Compliance Sequence
For the Rs 2 lakh student remittance, the bank's compliance officer must verify:
- FEMA authorization: Bank is AD Category I or II ✓
- LRS eligibility: Customer is a resident individual ✓
- LRS limit: Total remittances this year < $250,000 ✓
- KYC status: Customer's KYC is current (updated per risk category schedule) ✓
- OVD verification: Valid identity and address documents on file ✓
- PAN: On file (remittance > Rs 50,000) ✓
- UNSC screening: Customer not on sanctions list ✓
- FATF jurisdiction check: Canada is FATF-compliant — standard CDD sufficient ✓
- STR assessment: No suspicious indicators ✓
- Purpose code: Education — permitted under current account ✓
- TCS: Tax Collected at Source if applicable (5% above Rs 7 lakh threshold) ✓
- Inter-bank exposure: Nostro balance within 5% single-counterparty limit ✓
- FETERS reporting: Transaction reported under correct purpose code ✓
- Capital adequacy: Forex position within risk limits ✓
Fourteen checkpoints across three regulatory stacks — for a student remittance.
What Happens When One Stack Fails
If the KYC is non-compliant (say, the customer's KYC update is overdue), the bank cannot process the FEMA transaction — the UCB KYC Directions require current CDD for all transactions. This is the integration that the November 2025 consolidation was designed to achieve.
If the FEMA reporting is late, the bank faces penalties under Section 11 of FEMA — separate from any co-operative bank prudential consequence.
If the bank's CRAR falls below the minimum, the Supervisory Action Framework triggers — which can restrict the bank's forex activities entirely, among other actions.
The three stacks don't just coexist. They constrain each other.
The RBI's initial relaxation of forex rules — which created the multi-tier AD framework that cooperative banks eventually entered — was announced in 1997 as part of broader capital account liberalisation: RBI announces major relaxations in exchange control (PR_18513).
Last updated: April 2026