The story so far:
Because very few banks hold both rupees and rand, the payment involves converting rand to dollars and dollars to rupees where, in essence, the dollar acts like a vehicle currency, even though no American is involved in the trade. This is handled by SWIFT (Society for Worldwide Interbank Financial Telecommunication), which is a Belgium-based cooperative and overseen by the National Bank of Belgium along with the G-10 central banks, including the U.S. It is used directly by more than 11,000 institutions in over 200 countries. The Bank for International Settlements (BIS) found that active correspondent banking relationships fell by 20% between 2011 and 2018 with regional declines varying from 12% to 30% and Latin America being the worst affected. The 2024 BRICS report under Russia’s chairmanship argued that this part of the financial system is monopolised by a single institution, raising transaction costs. A bank that uses an alternative system to deal with sanctioned entities — several Russian banks were cut off from SWIFT in 2022, following Russia’s invasion of Ukraine — also risks sanctions, which deters others from joining. It is set to go live only in 2027.
Sending money from one country to another requires a chain of transactions. Let’s say, an importer in Cape Town is buying passenger cars from an exporter in Chennai. The payment does not travel directly from the South African bank to the Indian one. It travels via a series of intermediaries called correspondent banks that hold accounts with each other. Since the South African bank does not hold an account with the Indian one (and vice versa), the payment is routed through a larger international bank that deals with both and is typically headquartered in London or New York. Now, apart from the money, there are also instructions that travel between the banks. Federal Reserve. SWIFT is a messaging network, like a secure post-office. It enables institutions to exchange payment instructions through it and settle amounts separately. Smaller banks reach it indirectly through larger banks that are part of the SWIFT network, which is why it has become crucial and hard to displace. SWIFT claims that its SWIFT Global Payments Innovation has helped reduce transaction times significantly While speed of transactions used to be a major issue. Some structural delays remain even as the transaction chain has also become thinner. The reasons for this decline were largely commercial. Payment volumes kept growing during this period, even as they travelled through a smaller network. For developing economies, though, payments in a handful of dominant currencies such as the U.S. dollar, the euro and the Japanese yen expose countries to the monetary policies of the countries that issue them. Alternatives to the system suffer from the fact that they have to convince a large number of banks and regulators to join before being useful. A sanctions-hit Russia has pushed hardest for an alternative and is also the reason why others are wary of joining one. An alternative could be via a shared hub that each country joins. One such effort is Project Nexus, designed by the BIS and handed over to a company set up by six central banks, including India’s Reserve Bank of India. Notably, it is not a BRICS initiative. The BRICS discussions would extend this idea to the use of central bank digital currencies. Here, central banks issue digital versions of their currencies for use between banks — a settlement asset, not the retail digital rupee held by individuals — and exchange them on a common platform.
Both legs of a currency swap would occur at the same instant or not at all, removing the risk of paying out before the other side pays, which speeds up settlement and reduces the capital banks must set aside against such transactions.
Ahead of the summit, finance ministries’ and central bank representatives from BRICS countries met in Jaipur on August 12-13 to discuss financial cooperation, payments, and the wider use of national currencies in settling trade between members. The 2024 BRICS report claims transactions settled this way would yield significant cost savings. Only one such platform runs today – mBridge, built by the BIS with the central banks of China, Thailand, Hong Kong, and the UAE, which the BIS handed to its participants and left in October 2024. Over 95% of its settlement volume is in China’s digital yuan, according to People’s Bank of China figures reported by Reuters.
The 18th BRICS summit in New Delhi to be held in September , with India as the Chair, is expected to push for mechanisms to facilitate cross-border payments between members, including links between digital payment systems and central bank digital currencies (CBDCs), according to a report in The Hindu businessLine .
