India Mulls Bringing Domestic SWIFT-Alternative Across Border

July 5, 2022
As Western sanctions on Russia continue to bite and affect trade around the world, India has been the latest country to look at a potential alternative to the SWIFT messaging network.

As Western sanctions on Russia continue to bite and affect trade around the world, India has been the latest country to look at a potential alternative to the SWIFT messaging network.

In mid-June, the Reserve Bank of India (RBI) revealed that it is considering whether its local SWIFT alternative, Structured Financial Messaging System (SFMS), could go international.

In its Payments Vision 2025, the RBI said “it shall be explored to expand the framework of SFMS to provide a domestic payment system platform to other jurisdictions”.

The announcement comes at a time when India is increasing its purchase of Russian oil and gas as imports into the EU, UK and the US are restricted or banned.

Although trading in Russian oil remains legal, the US could in time use secondary sanctions to put pressure on India to stop its activities with Russia or risk being cut off from the US financial system.

This worry is not without reason. Previous sanctions against Russia included the decision to cut off some of Russia’s largest banks from SWIFT, which some argued weaponised the international messaging service and pushed Russia and China towards further enhancing the use of their local messaging alternatives.

“From the Indian perspective, they are likely concerned about the threat of secondary sanctions,” R. Andrew Gómez, managing consultant at Lipis Advisors, told VIXIO.

“This is a way for them, in the mid-to-long term, that if they get hit by secondary sanctions, they need an alternative. They need a way for their banks to communicate with other banks,” Gómez explained.

“If they create an alternative network that is not controlled either by the West as a whole or by the Chinese or the Russians, this allows the Indians the autonomy needed to maintain banking relationships,” he added.

SFMS, SPFS and CIPS - what’s the difference?

After Western countries have increasingly started to use SWIFT as leverage to threaten countries with cutting them off from the global messaging network, both Russia and China have turned their eyes to developing a local alternative.

Russia launched its domestic messaging network, called SPFS, in 2017 and currently has 33 participants from nine foreign countries including Cuba, Germany, Switzerland and six former Soviet states. This, however, is dwarfed by SWIFT, which connects more than 11,000 institutions in 200 countries.

In China, the Cross-Border Interbank Payment System (CIPS), which offers clearing and settlement services in cross-border yuan payments and trade, is scaling up.

The average daily transaction volume of CIPS reached $49bn (317.2bn yuan) last August, doubling the previous year’s average, but is still far behind SWIFT’s estimated $400bn.

It is not surprising that the Russians and Chinese are taking action to prepare for the potential use of international financial services by Western countries for political reasons.

However, now we have an instance when a player, that is not generally considered “anti-West” in perhaps the same way Russia or China are, is working on an alternative financial messaging solution, Gómez stressed.

SFMS facilitates communication for centralised payment systems, such as the National Electronic Funds Transfer (NEFT) and real-time gross settlement (RTGS) systems and is already used by Indian banks to communicate for domestic transactions.

Unlike CIPS, which is intended to increase the role of the yuan in international trade, the Indian messaging network aims to facilitate payments with India’s trading partners in the region.

In addition, India already has experience with exporting successful domestic payment products to other countries and “internationalisation” of its payment system is one of the five key pillars of the country’s strategic payments vision.

In February 2022, the technology behind India’s Unified Payments Interface (UPI) was exported to neighbouring Nepal. Its operator, National Payments Corporation of India, has also expanded international acceptance of its QR code-based instant payment system, including Singapore, Thailand, the Philippines, Vietnam, Hong Kong, Taiwan, South Korea and Japan. India is also connected with the Arab Monetary Fund’s Buna platform enabling multi-currency cross-border transactions.

Although the adoption of its local messaging service could not build on the use of UPI in other countries, it can serve as a basis for business relationships, Gómez pointed out.

“Whether it will succeed or not, it is hard to say,” Gómez said, noting that “it really comes down to how much effort Indians are going to put into it and whether they can convince their trading partners that it is something worth investing in”.

From the regulatory perspective, there is little that Indians could do to encourage adoption in other countries, and it could be a “hard sell” as the network could be used only for communications with Indians and other participants, according to Gómez.

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