What Is Remittance | Remittance Meaning In Bank | Types of Remittance In Banking | What is remittance of funds
The word remit comes from the word remitter, which means to send anything back. A remittance is a monetary payment that is sent to another party. In general, any payment of an invoice or bill is referred to as a remittance. However, the term is currently most commonly used to refer to a quantity of money sent home by a person working overseas to his or her family. Remittances are often used to help people in less developed countries obtain bank accounts, which is a growing trend that aids economic development. You can send money to India as an NRI for a variety of reasons, including supporting your family, making investments, or maintaining an NRE account. Read below to check the detailed information related to Remittance like Types, Considerations to select the correct bank, Documents Required, What is permissible, and much more.
What is Remittance – Comprehensive Details
Foreign employees send the majority of their Remittances to family members in their native countries. The most popular method of remittance is through a bank’s electronic payment system or a money transfer service like Western Union. Users of these services are usually charged a fee. It can take as little as ten minutes for a transfer to reach its intended recipient. In the economies of small and underdeveloped countries, remittances are becoming increasingly important. They also play a significant role in disaster relief, frequently outpacing official development support (ODA). They contribute to the improvement of people’s living standards in low-income countries and the reduction of global poverty. Indeed, since the late 1990s, remittances have outpaced development aid, and in some situations, remittances account for a major amount of a country’s GDP.
Types of Remittances
Based on the transaction purpose, there are 2 types of remittances:
- Inward Remittance
- Outward Remittance
- Inward Remittance: When your children live abroad and receive funds from you, this is referred to as inward remittance. Similarly, when your Indian parents receive monies from you (from abroad), the transaction is treated as an inward remittance.
- Outward Remittance: Outward Remittance refers to any transfer made outside of a country. For example, if your children are studying abroad and you send money from your India account to help them, it is an external remittance.
Economic Crisis of 2020
The economic crisis of 2020 had a significant impact on migratory workers and their families in their home countries. Remittances to family members are expected to plummet by 14% in 2020, according to the World Bank, compared to pre-epidemic levels. It predicted that migrant unemployment would rise, that fresh migration would reduce and that migrant returns to their home countries would grow. There is legitimate worry about the high cost of international remittances, especially given the increased focus on global financial inclusion.
Some governments confine remittances to bank wires to enhance transparency, although banks are the most expensive transfer route, and wires are among the most expensive, according to the World Bank. Banks charged an average of 11% in transfer fees in the first quarter of 2019. On average, post offices charged more than 7%. When traveling to Africa or a Pacific Ocean island, the costs can be as high as 10%.
Remittances are one of the most important sources of income for the native population in low-income nations or those with struggling economies. Mexicans, for example, sent more than $ 24 billion home from abroad in 2015, which was more money than the country earned from oil sales. 4
The collapse of Venezuela’s economy resulted in a massive migration to other countries, as well as a surge in remittances to family members left behind. Over $ 1.5 billion in remittances were transferred to family members still in the besieged country in 2017.
Important Points to Consider
- Financial intelligence agencies are concerned that remittances are one of the ways money might be hidden or violent actions like terrorism can be funded.
- Rarely is the methodology used by governments to record the amount of money received in remittances made public. While the bulk of value transfers take place via the internet or via wire, where they can be easily tracked, a significant quantity of money is moved in less transparent ways.
- Fees are being driven down by recent technology waves in international money transfers. Payoneer, Wise, and Worldremit are among the newcomers. Western Union is updating its technology. To achieve a safer financial inclusion, more regulation and oversight are needed.
Considerations to Select the Correct Bank
There are numerous aspects to consider while selecting the correct bank to initiate an international money transfer. You might be seeking the fastest transaction time or preferential rates, for example. Our comprehensive guide to international money transfer guidelines for NRIs will certainly assist you in making the best decision.
Money Transfer Methods
- Many banks offer online remittance in addition to cheques, demand draughts, telegraphic transfers, and wire transfers.
- For smoother and speedier transactions, the leading institutions use digital methods.
- Even if you’re thousands of miles apart, you can send money across borders quickly and securely.
What is Permissible?
The Reserve Bank of India (RBI) has released guidelines for inbound and outbound remittances in India. The Foreign Exchange Management Act governs these transactions (FEMA). FEMA has compiled a list of reasons for which you can transfer or receive money to India (from India). The following are the broad classifications:
- Medical Treatment
- Donations to India
- Monetary Assistance
- Expenses for travel for your loved ones
- Programs for education
- Tuition fees of universities
- India as a place to invest
- Profits from domestic deposits and asset sales (only applicable for NRIs and PIO)
When sending money abroad from India, Banks require the following documents
- A copy of the PAN card
- A completed remittance form
- If you’re sending money to India, you’ll need to double-check the documents with your local bank.
Getting the Funds to the Location
Three steps are involved in a typical remittance transaction:
- The migrant sender can pay the sending agent with cash, check, money order, credit card, debit card, or a debit instruction issued via e-mail, phone, or the Internet.
- The remittance is delivered by the sending agency’s agent in the recipient’s country.
- Paying the beneficiary receives the payment from the paying agent.
- In most circumstances, there is no real-time money transfer for agent settlement; the balance owing by the sending agent to the paying agent is resolved regularly through a commercial bank. Goods trading is occasionally used to pay informal remittances.
- A fee levied by the sending agent, normally paid by the sender, and a currency-conversion fee for delivery of local currency to the beneficiary in another nation are included in the costs of a remittance transaction. To account for unforeseen exchange-rate swings, some smaller operators charge the beneficiary a fee to collect remittances. By investing money before sending them to the beneficiary, remittance intermediaries (particularly banks) may earn an indirect charge in the form of interest (or “float”). In countries with high overnight interest rates, the float can be large.
Remittance is More Stable than Capital Flows
Remittance flows are steadier than capital flows, and they are countercyclical, rising during economic downturns or after natural disasters while private capital flows are falling. They are typically an economic lifeline for the impoverished in nations where political strife exists. According to the World Bank, they accounted for around 31 percent of GDP in Haiti in 2017 and more than 70 percent of GDP in some Somalia regions in 2006. During the financial crisis, remittances from source countries such as the United States and Western Europe proved to be resilient.
Migrants’ salaries were impacted by the crisis, although they attempted to compensate by reducing their spending and renting costs. Those who were impacted by the crisis found work in other fields. While the crisis reduced new immigration, it also prevented return travel since migrants believed they would be denied entry into the host country. Hence, even throughout the global financial crisis, the number of migrants and thus remittances continued to climb, and even more so in recent years in the face of wars and natural catastrophes such as hurricanes and earthquakes.
Transaction Expenses are Extremely High
Large remittances (for trade, investment, or aid) are slightly affected by transaction costs because they are tiny as a percentage of the principal amount, and major international banks are willing to compete for large-value remittances. However, fees for lesser remittances under $200, for example, which is common for poor migrants normally average 7%, and can be as high as 15%–20% in smaller migration routes.
Increasing the Flows
Governments occasionally provide incentives to boost remittance flows and direct them to economic uses. However, such regulations may be more difficult to implement than attempts to increase access to financial services or lower transaction costs. Tax breaks may stimulate remittances, but they may also encourage tax avoidance. Matching-fund programs aimed at attracting remittances from migrant organizations may take cash away from other local financing priorities, while efforts to channel remittances into investment have often failed. Remittances are essentially private funds that should be regarded similarly to other sources of household income. Rather than focusing on remittances, efforts to raise savings and better expenditure allocation must be made through improvements in the entire investment climate.
A remittance is a money transfer from one party to another.
Inward remittance occurs when your children live overseas and receive funds from you. In the same way, when your Indian parents receive money from you (from outside India), the transaction is classified as inward remittance.